What is a demo account?
Simply put, a demo account is an account that allows traders to trade in virtual currency with real-time market data.
A demo account is a virtual trading account used to reproduce real trading conditions in the financial markets. It is essential for new traders who want to learn how specific trading platforms work. The demo account also allows both new and experienced traders to start testing strategies without taking any risks.
This is important because the demo account is basically to help traders test their strategies and determine if they really work.
A trader’s main purpose when creating a demo account is to understand how the trading platform works. Traders who are new to the world of online trading should use the broker’s demo account to test out the various platform features the broker has to offer. Thus, they will avoid surprises when in the real money trading environment.(Read more : Hedge Fund)
In addition, new traders also need to learn the different types of orders and how they are executed. With a demo account, traders can start trading comfortably without fear of losing their capital. You need to know the difference between a pending order, a market order as well as a stop loss and take profit order.
Key factors to focus on when trading with a demo account
You need to make good use of the demo account to start real trading with the right mindset.
Explore the trading platform and its features
If you skip the demo trading section, you won’t have time to explore the platform and its various features. Even an experienced trader should experience a demo account before trading for real.(Read more : swing trading)
The first purpose of a demo account is to help traders understand the trading platform. Example: If you want to use Metatrader, you will learn the different order types, technical indicators and how to use them.
Through the demo account you can also get familiar with navigating the platform, finding the news feed, reading quotes and adding various indicators on the chart.
Improve your strategies and test new ones
Contrary to popular belief, demo accounts are not just for new traders. Even experienced traders use it to test new strategies and improve the ones they are already using. Example: After a series of losing trades, a trader can use a demo account to find out the shortcomings of the strategy he has made before.
For new traders, they will understand how position size affects profits and losses. Investors can learn to develop new ideas and methods to maximize profits, minimize losses, and test approaches before applying them to the market.
You can also test automated trading with a demo account on multiple platforms that offer trading robot functions like MT4 and MT5. Traders can also learn to create their own indicators and experiment with them.(Read more :Leverage in Financial Trading)
Learn technical indicators
You wouldn’t know all the technical indicators without a demo account. The demo account will allow you to learn how the indicators of your interest work. Example: To better understand the moving averages, you can simply place a moving average on the chart and observe it. By varying the period of the moving average, we will see that the smaller the period, the faster the moving average.
You need to understand the fluctuations between the technical indicator you are using and the price action. Traders should not only know how to use technical indicators, but also be aware of some that are not useful for their trading methods.
For traders using robots, the importance of understanding how indicators work is even more important, as they will be using technical indicator settings to open or close positions.
How to own a demo account?
You can open a free demo account on most exchanges by submitting an online request from their website.
Opening a trading account like this is relatively simple. Most brokers offer free demo accounts. Visit the homepage and request a simple form. You usually don’t need to submit any documents to be able to use the demo account.
For more flexibility, the TradingView platform offers unlimited demo accounts that allow you to trade thousands of financial instruments.
Advantages of a demo account
Demo accounts give traders a real advantage. There are very few fields where such accurate simulations can be made.
Develop your skills
Demo accounts help traders to develop their trading skills. With a demo account, you are free to experience a variety of trading methods. You can learn different trading styles: scalping, day trading, swing trading or algorithmic trading.
Then all you need to do is choose the trading style that works best for you. After choosing the style you want to experience, you use the demo trading account to test different strategies without worrying about any risks.(Read more : Day Trading for Beginners)
Learn about risk management
Trading is not a game and you can easily lose your savings! Therefore, learning how to manage risk is essential. Luckily the demo account also supports this. New traders can learn about position sizes, margin requirements and leverage, helping them to avoid unexpected changes in the market when trading real accounts.
The demo account also allows you to learn the volatility of different instruments. One instrument may be riskier than another. You will have to adjust your position size according to the volatility of the instrument you are trading.
Free demo account
You can open a demo account on the stock market and use it for free. If you have an unlimited demo account, you can continuously improve a trading strategy until it becomes profitable. In addition, most online brokers offer free quotes of thousands of instruments as well as financial information through your demo account.
Try multiple exchanges before making a decision
The demo account allows you to test out different brokers and their features. Before making a deposit, you need to understand factors such as: spreads, order types, trading conditions, analysis tools, etc. Thanks to the demo account, you can choose for yourself the most suitable trading platform.
Disadvantages of a demo account
Psychologically, demo trading will always be different from real trading.
Live trading conditions may also differ from demo trading
While demo trading is very real and uses real-time data, live trading can be very different, especially as market volatility increases. Order execution may take longer and the overall experience of live trading will be much different from demo trading.
No demo slippage (demo slippage)
To make the demo experience appealing to potential customers, brokers usually don’t copy demo slippage. This phenomenon usually occurs in practice when the bid or ask price you are trying to secure is executed at a different price. Slippage can be harmful for scalping traders.
In demo mode, the whole system is very flexible and you will have no difficulty placing orders. However, in reality, orders may not be executed immediately, thereby leading to slippage.
Unable to use trading news properly
In Forex, news can be accompanied by large price movements that traders try to exploit. However, the execution of commands around the news will usually be delayed by a few seconds. Since demo trading conditions are always ideal, you will not be able to properly test news trading using a demo account.
Since there is no risk, traders will tend to place too many demo orders. The idea of taking back your losses really fast can work in demo trading, but in real trading it can be harmful for you.
The psychological and emotional aspects are almost non-existent in demo trading
To trade successfully, you often have to learn how to manage your emotions in the right way. Unfortunately you can only learn this in real trading because people usually won’t be emotionally affected by virtual gains or losses.
Switch from demo account to real account
It is often difficult to switch from a demo account to a real account
The conversion was supposed to be easy, but the reality was very different. Most traders lose money as soon as they switch to trading with real money. Some lose money right from the start. Traders often have a difficult transition from a demo account to a real account.
The pressure that traders are under is greater than when trading with real money. The transition to real trading becomes even more difficult when a trader is only demo trading for a short time. Market volatility is constantly changing and spending only a week or two using a demo account makes it difficult for a trader to be ready for the varied market cycles faced.
This is why we mentioned in the “Mistakes to Avoid” section, you need to spend the necessary time to test your trading strategy.
Demo accounts help you get the best preparation before trading with a real account. Once you gain experience in demo trading, you will be able to switch to a real account and understand all the features of the platform. However, the demo account also has certain limitations, it does not make you have real psychological and emotional experiences when winning or losing. These experiences only appear when you trade with real money.