What is a Demo Account in Forex?

If you are new to forex trading, then an obvious question that would pop in your head is what is a forex demo account, and how can you trade with it? 

Many beginners don't have a clue about demo accounts and how they work. 

In this guide, we are going to answer these questions and reveal why you should start trading with a demo account. 

What is a forex demo account?

A forex demo account is a type of account provided by trading platforms funded with virtual money and allows you to test the trading platform and its various features before deciding to open a real account funded with real money.

If you are familiar with gaming, think of a demo account as a simulator. A simulation game tries to replicate different events from real life in the form of a game. 

Like a simulation game, demo accounts allow you to do this on a computerized simulator. The virtual trading environment allows you to familiarize yourself with the platform while also practicing and honing trading strategies. 

Using a demo account allows you to gain trust in your trading decisions; you can trade without worrying about making mistakes. These accounts allow you to keep track of market conditions and experiment with various charting tools and indicators.

You may also practice using stop-loss and limit orders as part of your risk-management approach by becoming acquainted with the steps involved in entering, evaluating, and executing trades.

Whether you trade forex, stocks, or commodities, there are free demo accounts available for you to try.

Taking the time to learn how each platform works will allow you to determine which one best fits your trading style.

Demo accounts are also common among traders who are skilled in forex trading but want to try their hand at other asset classes.

Even if you have extensive experience trading forex, you may want to open a demo account before investing in futures, commodities, or stocks. This is due to the fact that these markets are subject to different influences, accept different types of market orders, and have different margin specifications than forex instruments. 

You may have seen ads all over the internet, or if you surf financial sites, you are often exposed to many ads that try to entice you to open a demo account. 

Most brokers offer a demo account for free, but why is it free?

Of course, brokers are not doing this for the goodness of heart. Since the broker wants you to fall in love with them and deposit real money, they want you to learn the ins and outs of their trading platform and have a nice time trading on a demo account. 

Let's dig in deeper and find out how demo accounts became a major thing in the financial markets. 

History of demo accounts

Demo account trading can be considered a more modern version of paper trading. Paper trading used to include writing down entries and exits to see how a strategy performed in the market.

Demo accounts were first offered by online brokerages in the 2000s when high-speed internet became more widely available across the world.

Demo accounts have also been used to teach high school students in the U.S. the fundamentals of stock market investing. 

Many schools around the country offer personal investment or economics courses that enable students to keep a demo stock account and track the progress of their assets during the semester. 

And that's how demo accounts came into the scene. 

Why should you start trading with a demo account?

"Do not open a live trading account until you have successfully traded on a demo account." This is what most experienced traders will tell you.

If you can't wait until you're successful on a demo account, there's a small chance you'll be profitable when real money and emotions come into play.

You'll need time to concentrate on improving your trading processes and developing good trading habits. 

You'll also need to be exposed to various market conditions and learn how to adapt the strategies and tactics as market behavior shifts. 

Imagine you start trading on a live account as a beginner with no knowledge of the forex market, and in the first month, you lose all your trading capital. 

You don't want that, right? 

So, that's why you should first start with a demo account. 

Pro Tip: Stick with one of the majors like EUR/USD when trading on a demo account because it is the most liquid, which usually means tighter spreads and less chance of slippage.

How to make demo trading realistic?

Demo trading has many advantages because it provides new traders with a general understanding of how the market operates.

So, is it possible to trade a demo account in a specific way to make it more realistic? 

While a demo account can never have the same results as live trading, there are a few things you can do when testing on a demo platform to make the results as realistic as possible. 

1. Keep it real

As much as possible, pretend the money is real. Although these emotions are different than trading on a live account, keep an eye on your emotions and how trades are impacting you mentally. 

Since virtual capital offers no real loss or benefit, you must add your own sense of loss or profit. One way of doing this is to withhold something you enjoy if you fail to execute the trading plan or to reward yourself when the trading plan is followed. 

2. Trade with minimum capital

Trade the same amount of money in the demo account as you would in the live market. Don't use any funds from your demo capital that is greater than your live trading funds.

How is forex demo trading different from live trading? 

Many traders trade profitably on a demo account, but they experience losses when they move to a live account.  

But why this happens?

1. More trading capital

In some instances, a demo account allows you to choose the amount of capital to perform trading. The sums vary, but they are often very high (and beyond the actual capital the trader has for trading their own account).

Demo trading with more money than would be reasonably traded provides an impractical safety net for a trader. Small losses can be recouped more quickly with more capital; a loss on a smaller account is more difficult to recoup. 

2. Emotions

This is one of the most noticeable differences between demo and live trading. Fear of losing one's own money will damage a tried-and-true trading system and prevent the trader from properly enforcing it.

Greed (or hoping that a losing position would turn profitable) may have the same impact, holding you in a trade long after you should have exited it.

When real money is at stake, it is a very different experience than trading on a demo account where success or loss has little effect on the person's life. 

Bottom line

So, there you have it. Trading on a demo account has its perks and limitations; however, if you don't want to lose your capital and experience a thrilling world of forex, then go for a demo account.

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