Forex demo trading account vs real account – pros and cons

On September 13, 2011 | By | In Forex tips

As a forex trader I have to say a few things about demo account for forex trading. As you might already know, almost every forex broker has a demonstration account for your trading practice, where virtual funds are used in a real forex market. I suggest you do exactly that, before trading with your real money.

First of all, when you try on new things, you want to get familiar with it, especially, when your new venture involves using your hard earned money. If you drive a car, for instance, and you don‘t know how to pull the brakes, you will be hitting something eventually.

Putting it shortly, you need to know how to manage your open positions, leverage, where to place stops and entry orders, what forex signals and indicators to use and under what market conditions and so on and so forth. Accustoming yourself with a forex trading platform is also very important, and that‘s only your initial step.

Why do brokers offer demo forex trading account?

Some newbies will be worried about the motives of the brokers offering currency demo accounts. In my opinion, that’s the least you should worry about. They are just trying to attract more real account traders, which in turn generate more money. Brokers hope that after you have used the demonstration account and witnessed how quickly money can be made, you will start trading with your real money in a real account. Besides, there are no charges for using fx demo accounts. If you are paranoid of giving away your personal details, you could even create a pseudonym, using only your email (which could also be purposefully created for the demo account).

You can test your currency trading method in a demo account

Testing your currency investment method or system in forex trading demo account is of utmost importance. It‘s crucial to trade according to some technique that proved to be profitable in a long run, and the only way to do this is practicing in demo account. I believe, most traders discovered their „holy grail“ forex strategy while practicing on demo versions.
Despite all the advantages of the forex demo account you must have in mind several things…

Trading in real forex account will be different

Trading in real account will be quite different from trading in demo account. Sometimes the orders that you place will take much more time to be executed in real account than in demo. If your strategy is based on short time order placements (getting in and out in a couple of minutes), this time slippage will definitely mean a drawback and money loss. Check those things before choosing your broker.

Trading psychology is a crucial point in forex market

Trading psychology is a crucial point in forex market. When you have virtual money, let‘s say, 50.000 dollars, it‘s easy to use high leverage, jump into trades without any analysis and planning and make some profit. You will not experience any stress playing with virtual money, and the deceit of easy money in forex will only tempt you to start playing with your real money. The same thought went through my mind on the first day I „earned“ 850 dollars. I did it without any system and method. That was a huge amount of money and I definitely got excited. Fortunately, I lost more money the second day, so I refrained from my decision to trade with real money. I did not have forex trading strategy, I did not know anything about indicators, money management, I was not familiar with forex basics. I could make some profit in the short term, but I was destined to end up broke in the long term trading.

If you do not know anything about forex fundamentals, technical analysis, trading psychology, money management, indicators and trading technique, it will only be for your own good to train with virtual funds. Otherwise, it will be your money, real stress and real loss. Just one faulty trade and a suffered loss might lead you to desperate desire to „revenge“ the market and that will be pure gambling, which has nothing to do with profitable forex trading.

Forex money management strategies

Psychological factor leads to another crucial issue – money management. The chosen high leverage in practice account platform would mean big profit with only one trade. Likewise, it would also mean a big money loss, if a chosen currency pair would go in the wrong direction. You may have a good profitable trading system which you have tested in demo account, but using high leverage is not enough. You have to apply some probability rules and sound money management, which would keep you from making irrational decisions when you are losing or wining, and it must be done trading in demo account.

Risking a fraction of your balance

Loss means stress and frustration, winning means excitement and joy. You will only be able to control your emotions when there is a rather small part of your balance at steak. It‘s very hard to keep to a strict money management in demo version and you will always be tempted to “play big“. If a successful trade probability is 60% you still cannot risk 20% of your balance, because you will lose everything in just 5 successive losing trades. And you can never be sure that your next trade is a winner. Forex will never give you that opportunity.

There is no easy money

Remember – there is no easy money in forex, greed and stress are not welcome in this kind of investment. If you want real trading and real money, be ready to face some psychological pressure, which will never be fully experienced in forex demo trading account.

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