Nowadays, the average individual can open a demo trading account and commence with its use, all in less than ten minutes: and with little to no restrictions. All indicative of good times for new traders; or is it not?
No, demo account trading is not identical to real account trading; for if it were, it is unlikely that most brokers would maintain an obvious duplication of costs. There are a number of differences between both trading accounts. But of greater consideration, perhaps, are some of the reasons behind the widespread availability of demo accounts. Let us explore both considerations further.
Many individuals believe that demonstration trading accounts are created and widely distributed, to help new aspiring traders learn how to trade and test new methodologies. Although some individuals derive such benefits, brokers make such platforms available with different primary objectives.
Why Do Demo Trading Platforms Exist?
You might recall we previously discussed ‘how much money is needed to start trading forex’, and that brokerage firms are ‘businesses with objectives and targets: including the need to secure new depositors into real accounts. Some brokers begin their approach to this requirement by initially offering free educational materials (of some sort) to potential traders. The brokers anticipate that some of such potential traders would feel inspired by the material they’ve read and would want to engage further with the subject of trading: in a cost-free manner. Such individuals are then directed towards the option of utilizing demonstration accounts as a means of gauging ‘what’s possible’.
So, we understand that demo accounts serve as one of a few means of attracting potential speculators into the world of trading. But did you recognise the fondness for the term ‘demonstration’ as opposed to the term ‘demo’? If so, a reasonable question to keep in mind ought to be “what exactly is being demonstrated, and why?”
For many brokerage firms, demonstration accounts serve two main purposes. The first is to support efforts toward attracting new potential traders. The second is to weaken legal grounds for potential claims that could be presented by new novice traders. Now, if an individual were simply to open a new real account shortly after reading a brokers’ educational materials, and proceeded to consistently lose money (as should be expected) on the account, the novice trader could feel hard done by, and perhaps consider pursuing legal claims, on grounds of being offered a platform supported by inadequate information and or training. To avert such potential, demonstration accounts are often provided with no time limits.
Possible Differences Between Demo Account Trading and Real Account Trading
For some individuals, the primary benefit of using demo accounts is flexibility in allowing for familiarisation with the mechanics of any given trading platform. With that aside, there are several differences between both trading accounts, some of which are unfavourable to the development of new traders.
Some demo accounts lack data and speed accuracy, when compared to real accounts offered by the same brokers. This is likely due to more computer server (and other) resources being prioritised for real accounts.
The use of demo accounts can encourage lack of accountability, and the incubation of unfavourable habits. This is more likely when an account has a leverage allowance that is well beyond what the account holder can afford to maintain under a real trading account structure.
The nature of an individual’s trading psychology cannot truly be ascertained, tested, or improved whilst exclusively trading on demo accounts. That is because unlike real accounts, demo accounts do not require real financial assets to be held as collateral against one’s action in the markets.
How Long Should I Trade a Demo Account?
Demonstration accounts are useful and have a key role to play in the early developmental stages for many new traders. But the reality remains that, at some point in time, a new trader that intends to progress beyond ‘early learner’ stages must progress away from demo trading and into simulator or real account trading. So, when is it appropriate for a new developing trader to consider such transition?
There are four general requirements which ought to be satisfied before any consideration of transitioning from demo account trading to real account trading. The earlier those are satisfied, the sooner one may transition towards real account trading.
Mechanics of Trading Platform
One must have a thorough understanding of any trading platform that is adopted for trading; this includes understanding of settings, templates, hotkeys (if available), and any mobile versions.
All Aspects of One’s Trading Plan
Put simply, trading is about execution. One must thoroughly understand every aspect of a written trading plan, and how to approach implementation under various conditions. That would include how to get in and out of positions (including scaling techniques, if applicable), and risk management.
Adequate Understanding of Your Trading Psychology
One cannot gain adequate understanding of the markets prior to adequate understanding of self. Try uncovering and observing as much about your psychology as possible. This includes how your feelings change during a trade, how you feel after a series of loses, and even how you feel after a winning trade. This is undeniably crucial.
Reasonable Starting Capital
It takes money to make money (be it savings or borrowed): and trading is no exception. Trading is an activity that requires adequate financial resource. The approximate amount of money you are likely to require as reasonable starting capital has been discussed here, “ Deciding the Right Amount of Money for You”.
Why Do I Trade Better on A Demo Account?
This concern is rooted in your trading psychology, and is associated with fear (be it known to your consciousness or otherwise) of losing trades: and ultimately losing money. Inevitably, it suggests that more work need be done in understanding and reinforcing your trading psychology. See “ How Do I Start Learning Forex?” for more information on how to address this concern.
Also, keep in mind that a trader (regardless or experience of skill) must never trade with an amount of capital that cannot be written off as a business lose. If you can’t afford to lose it, don’t trade with it.