Introduction
If you are thinking about trading forex for the first time, you will know that many forex brokers are desperately trying to lure you in with the offer of a free demo trading account in the hope that you will eventually go on to open a live trading account with real money.
Indeed you will find that all of our recommended brokers offer free demo accounts, and in most cases you just need to enter a few personal details to get started, such as name, email and phone number, for example.
This is normal practice in the forex industry, and to be fair, these demo accounts can be very useful if you have little or no previous trading experience. However there are also a few drawbacks of demo trading accounts that you should be aware of.
So in the rest of this article, I want to list both the pros and cons of these free demo accounts to help provide a balanced view.
Pros
Learn More About Forex Trading
If you open a demo trading account and start entering a few trades with virtual money, you will quickly discover how difficult it is to make money first of all, but more importantly, you will start to learn how prices move during the day and how they are affected by economic data releases, for example. So this is a great way to educate yourself about the forex trading industry.
Familiarize Yourself With Trading Platform
Each forex broker will have their own trading platform and their own charting software, and so if you open a demo account with one of these brokers, you will quickly learn how to use their platform, how to execute trades and how to move your stop losses and target prices, for instance. This will prove useful if you go on to open a live account with the same broker.
Test Out Different Trading Strategies
Another key benefit is that you can experiment with different trading strategies without risking any of your own money. Most demo accounts will provide you with some virtual trading capital, and so it doesn’t matter at all if your chosen strategies end up losing money.
Cons
Can Never Replicate A Real Money Account
The main drawback of a demo account is that it will never be able to replicate a real money account. When you are playing with pretend money, it doesn’t matter if you lose, but when you are trading with your own hard-earned money, your emotions, thought processes and decision making are heavily influenced by the fact that you could potentially lose (or make) a lot of money.
Therefore even if you are able to generate consistent profits by using a seemingly profitable strategy on a free demo account, you may not necessarily be able to transfer this success to a live trading account.
Different Spreads / Execution
One final drawback is that you may well find that your orders are filled instantly on a demo account, but when you eventually start using a live trading account, the spreads will be larger at busy periods of the day, and the execution of your orders may be a little slower.
Final Thoughts
In my opinion the key benefit of using a demo trading account is that you can learn how to use a broker’s trading platform. However I don’t really recommend that aspiring traders spend too much time playing around with a demo account once they have achieved this goal.
Yes you can of course test out different strategies, but you are better off using some kind of back-testing software to test out your strategies and then start replicating these strategies on a live account.
You will generally learn so much more about forex trading by diving in and trading with your own money. Losing money forces you to become more focused and to keep on refining your strategies and decision making processes until you are consistently profitable, and even some of the very best traders blew up a few accounts before they started making money consistently.
So while demo accounts definitely serve a purpose, you will generally advance a lot quicker by trading with real money, even if you only start off with a small initial deposit.
Leave a Reply