Using a forex demo account is an excellent way to get accustomed to the foreign exchange market if you are a novice trader, or for testing out the new strategies if you do have some trading experience and you want to see if your new tactic will work well in the live market. Of course, there are some differences between trading in a safe environment when there is no real money on the line and the actual foreign exchange market where you can lose your funds if you make a single wrong move or you are not focused enough and you didn’t prepare your trading strategy in a proper way.
Having in mind that forex is the largest global market existing in the world today and that it attracts people from various backgrounds and occupations, it is safe to say that testing your skills while using a demo account is the first step you should take if you have decided to start trading on the foreign exchange market and become a part of it.
The demo accounts give you the freedom to take bolder moves and perhaps you had a couple of lucky breaks that made you double your profit on a demo account in a short amount of time. You might feel like you are ready for entering the real market and you are certain that you will perform in the same light with the real money. This might not be the case since the actual foreign exchange market presents a whole new environment and you might not be as successful as you were with your demo account because there is a lot more pressure once your actual money is at risk.
The psychological factor of the trading plays a key role in making a switch between the demo account and the actual market. When a trader is aware that they are investing the virtual money, there is less pressure to always protect their funds and they have the ability to make more daring and courageous moves they would not even consider if their real investment was involved. Once they see the steady rise of the amount of money they have on their demo account, traders feel like it is the time to switch to the real account and the things would stay the same, meaning that they would continue in the same upward direction. However, they might not be consciously aware of this, but once they put their actual money out there, the trader’s mindset simply changes. They are more cautious and watchful, losing the courage they once felt while trading the virtual money and therefore, it is unrealistic to expect the exact same performance they had on the demo account.
In order to prevent this from happening, a trader should treat the demo account in the same matter as the real account. Perhaps it is hard to imagine that the virtual money is tangible but it is the most useful tactic which will aid you in the long run once you leave the demo account in favor of the real market. Your mindset will not change and you should have the same trading experience in both accounts if you are true to your trading strategy. You should do your research of the market properly at all times regardless of the type of account you use in order to make a habit out of it from the very beginning of your trading career and it should be a part of your trading tactic from the start.
Limiting your losses
There are many traders which are not feeling comfortable when they lose their money and that is perfectly understandable. Nobody likes to fail after all. This can be even more exaggerated once the actual money is at risk. Perhaps you might not have thought about it when you first started learning about the trading on the foreign exchange market, but every trader should have an already prepared plan if the trade goes wrong. It should be a part of their trading strategy and demo accounts are the great place to test it out before they start trading in the actual market.
Placing a stop-loss order is one way to keep your money safe and prevent a huge loss which would set you back significantly. Another way to control your losses once you make a switch from a demo to a real account is to simply start small, meaning that you shouldn’t invest all of your money, but ration it up and observe how you behave once there is a possibility of losing the actual funds. Trading in small quantities on the live market can point you out what works and what doesn’t. It is a proper way to make a transition between the accounts and to get used to trading in the real foreign exchange market.
Difference in execution
A trader’s performance on the live market can be influenced by other outside factors such as the difference in execution. The trades which are completed on a demo account are not sent to the brokerage firm or to the market so the execution might be faster than on a real account. Also, some differences involving the stop loss orders have been noticed.When you use a stop loss order on a demo account, the trade is terminated at the exact price set by a trader. However, that might not be the case when using a real account and many traders have noticed this imbalance.
There is also re-quoting, meaning that the brokerage firm might offer you one price on your demo account and a different one on the real account. It also happens after you place your order, so sometimes brokerage firms do not play it by the rules. This can occur at the times of high liquidity in the less stabile markets which are prone to fluctuation in times of data releases or under the influence of outside factors such as political and economic changes. The brokerage firms might simply change the price right after you have placed your order, making sure they do not lose a lot of money. The only safe way to avoid this is to trade when the market is not fluctuating, avoiding the official data releases, or sticking to a more stable market.
Before you choose the brokerage firm you wish to trade with, you have to make sure it is legit. There are many websites that deal with reviewing the brokerages and reading the opinions and experiences of other foreign exchange market traders will help you a lot with your future decision. Besides the websites with the reviews, there are numerous forums and online communities which bring traders together so you can ask around and see what they think about a certain brokerage firm. Doing a quality inquiry is very important because you don’t want to give out your personal details to someone who is not established and provide them with an opportunity to abuse your trust.
Demo accounts are a terrific way to get a feel of the foreign exchange market and to see how the exchanges are actually made. You learn about the process by trading on your own and that is the perfect way to prepare yourself for entering the real market usinga live account. You should take your time and practice for as long as you want, exploring the possibilities and various strategies you can later apply in order to earn the real money.
Surely, once you make a switch to a live account, you become responsible for your own funds and there is a possibility that you might lose. In order to protect your assets you need to take the training by using a demo account seriously and trade with the virtual money just like you would with the real funds. In doing so you will avoid the trap most traders fall into and that is the change in the psychology of trading. Yes, you will leave the safe trading environment behind, but you would still be careful and apply the same strategy you used before, making sure that the success you made in the demo account follows you into the actual world of the foreign exchange market.
Demo accounts are not limited to novice traders only and they can be used whenever you want regardless of your previous trading background and knowledge. So even if you are an experienced trader, demo accounts will come in handy when you want to test out a new trading strategy you wish to pursue in the future. Inspecting the way it works in the market without putting anything on the line is very effective and also risk free. Therefore, everyone can take an advantage of virtual trading in order to improve their skills and bring them to a higher level which can be practical once you begin trading with your actual money in the live market.