Why a Demo Account in Trading is a Big Mistake
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Dip your finger in the plethora of sources explaining and helping you get familiar with forex trading and you will see that so many of them stress out the importance of having a demo trading account opened long enough before you delve into the real world of forex trading.
However, what many forex traders with experience can tell you is that demo trading is not good practice and since you are trading with demo money only, there will not be the risk management psychology behind risking your own hard-earned money and as a result, you are not trading with discipline.
If you are not familiar with this one by now, discipline and patience are two of the key factors affecting your forex trading experience in a good way, a way that helps you grow, potentially enjoy success and get better.
Not trading foreign exchange with discipline usually results in a quick draining of your real account, once you have one, and while you are still not prepared for the mental effect trading with real money has.
However, forex trading is a life-long journey of learning and as a forex trading beginner, you should take any opportunity to learn.
Getting used to the safety of a demo account is not going to help you learn from real challenges, risks, overcoming real fears, know more about your weaknesses and strengths.
So why a demo account in trading is a big mistake? Let’s find out!
Why a demo account in trading is a big mistake is a question that not many sources will give an answer to.
It is important to discuss this topic, especially considering the fact that many places will try to convince you of the importance of demo trading.
No matter if you decide to trade with demo money or skip this part of your experience as a forex trader, the most important thing is to always start with a good base of knowledge and understanding of the mechanisms of the forex market.
The best fundamental knowledge and understanding of how forex trading works you can get by enrolling on a world-class, up-to-date forex trading education course that is tailored to your needs when it comes to learning.
We at Trading Education know the importance of good training and this is why we welcome you to take part in our high-quality ultimate forex trading basics course here. The best part is that you can get this course for absolutely free!
Now that we have talked about the importance of learning and education for becoming a forex trader with better chances of success, let’s discuss why a demo account in trading is a big mistake and why demo trading does not help you with learning.
What is a demo account?
Demo accounts are advertised everywhere online and as you can tell by the name are the modern internet form of paper trading and involves similar methods of seeing how the methodology you use for trading plays out in the market.
With that being said, many financial websites are offering you to open a demo account that is a simulation of the real-life experience and pretty much means trading with currency pairs under the same circumstances as you would do with a real account, however, you are not investing real capital and you don’t need to spend your own money.
This simulated trading environment gives the beginner the chance to get used to the software they will use once they open a real broker account.
However, there are several considerations you need to take into account and some of them will make you consider the question…
Why a demo account in trading is a big mistake?
Many forex beginners start with a demo account but once they move to live trading they find themselves in a situation where they experience a string of losses even after they have reached a level of constantly successful trades while trading with demo money.
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Why is this happening?
- Demo accounts provide better execution – One of the main things that differ demo accounts from live trading is the lack of slippage. Demo accounts are normally filling a market order at the exact price showing at the screen. However, in live trading, the order places is often a subject of slippage and it is quite a common thing for the market order to not be filled at the price expected or a portion of the position to be filled at a different price than expected. With a few other differences to live trading, a demo account is often highly subjective experience and does not represent the real events, challenges, and risks of forex trading but mainly help you to start training your trading style.
- Demo accounts provide you with more capital than what you will otherwise be keen or investing – Demo accounts do not provide you with a real sense of money management and risk management and they teach you to use techniques you wouldn’t otherwise utilise in real trading. Simulated trading with more capital than what you are ok with investing otherwise provides an unrealistic perception to trading and an unrealistic safety net for you. With more capital, you have a larger account that allows small losses to be easily recouped. However, with smaller accounts (like most likely your real account will be at first) it is more difficult to recoup losses. Furthermore, your demo account may provide you with instruments and volume that cannot be replaced by your live account and with real capital.
- Demo account cannot simulate the emotions you will experience with real money – Risk management is one of the most important things you have to learn before entering to the forex market and you will be often be told that emotions and emotional trading are not part of the whole picture if you are aiming to success and profit. However, this does not mean that you will suddenly be able to have full control over all your emotions such as fear or greed and be able to keep them out of the equation. You will be emotional as a forex trading beginner and fear will be the leading emotion when you are investing and risking your own hard-earned money. The lack of experience will make it harder for you to stomach potential losses, even small ones. This is something that a demo account cannot simulate and make you feel as you are not fearing the loss of your own capital. When money that can have a potential material and even mental impact on your life is on the line, it is far different from trading a demo account and you will most probably make different decisions. You will be more risk-conscious and your risk tolerance will definitely be lower when there is a risk of losing your own investments.
Can demo accounts feel more realistic? Here are a few ideas by Investopedia for how to take advantage of the benefits of demo accounts and how to make the whole experience feel more realistic.
The problem with demo accounts is that demo results rarely correlate to results you will get and the experience you will have when real money is on the line and when you are trading from a live account.
When it comes to a demo account you commonly will not be able to get the same execution, emotions, and play with the same capital as you would do with your real account where your hard-earned investments will make you more risk-cautious.
At the end of the day, demo accounts can give you no more than a simulation of the real challenges, weaknesses, and strengths of the forex market and of you as a trader and this is why a demo account in trading is a big mistake.
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