A demo account is a virtual account that comes with play money that you can make virtual trades with. Demo accounts are free of charge and they are supposed to represent actual market conditions. Some brokers limit the demo account to 30 days of use. A good broker allows unlimited use of a demo account.
What are the benefits of using a demo account?
- Low cost -Demo accounts do not cost anything. Most brokers want your name and phone number so they can contact you to try to convince you to open a live account and deposit money. That is the only real “cost”.
- Less risk – Developing a trading plan that works for you is one of the most difficult things to do. A demo account will allow you to try different trading ideas until you come up with a system that makes you comfortable. A demo account will allow you to explore the strengths and weaknesses of a trading system without risking a single penny.
- Learning opportunity – Trading platforms can be difficult to grasp at first glance. The ability to use the demo version of a trading platform with play money allows you to learn the functions of your trading platform before committing your money. A broker may seem great to you, but if the trading platform is poorly put together, it is better to figure that out while testing rather than while risking your hard earned dollars.
What are the drawbacks of using a demo account?
- No understanding of real risk – It is an advantage to be able to trade without risk, but it leaves an important element out of the act of trading. Trading psychology is important. It feels very different when your hard earned money is on the line. The demo account saves you from potentially massive losses while learning, but does not teach you anything about dealing with the emotions you will feel once that account balance is connected to your wallet.
- No encouragement of sound money management – A demo account comes with a large amount of money deposited in it. Most of the time, a true beginner does not have a large amount of money to trade with. The amount of money that is usually deposited in demo accounts ranges from $50,000 to 100,000. These large amounts set up a psychological expectation to make large amounts of profit easily. This can encourage excessive risk taking once you switch to a live account with real money. The big difference is, when you have a live account and lose, it’s for real.
Opening a forex demo account can teach you a lot about trading. They allow you to learn to trade without putting your money on the line. This can be a big advantage if you are a true beginner. Make wise use of availability of demo accounts and practice trading before committing your money.
Ready to learn more? Check out this article on trading using the martingale strategy.