A forex demo account is a very important tool for assessing a broker’s platform, testing your technical analysis skills and lots more. Using a demo account is highly recommended.
Yet it doesn’t fully prepare you for the real thing. Here are 4 pitfalls for demo accounts, and solutions for part of them.
- Demo trading doesn’t include execution problems: Even the best brokers with a strong reputation and many liquidity providers cannot avoid a failed execution of your orders. This is reality, especially in extremely volatile market conditions. Execution in demo accounts doesn’t fully mimic real accounts. Unfortunately there’s no solution for this issue, and this doesn’t mean you should skip demo trading. Just be aware of this.
- Amount: The amount of money that you’ll see in your demo account will usually be much larger than you’ll deposit. This will make every loss you encounter in the demo account as less meaningful and may enhance the feeling of “monopoly money”. So, you’ll be less prepared for the real thing. In addition, you”ll get used to big position sizes, and wehn you’ll reach the real thing, a few losing trades could burn your real money. Solution: Ask the broker to adjust the amount of demo money to the number you really think of depositing.
- Broker may add demo money: This practice isn’t too common, but you should still be aware of it and refuse to accept it. Refilling the account when it’s close to depletion may help you continue practicing and will also prepare you for more real deposits in the future, something the broker always wants you to do. But on the other hand, it may also give you the false feeling that it’s just another computer game when you can always click “New Game” and also hinder your performance with a real trade. Solution: Ask the broker to “withdraw” the demo money from your account.
- Once you’re in, you’re in: If you test only one broker’s account, you’ll most likely proceed with depositing real money. Why? Because you’re already familiar with the platform and the salesperson encourages you to dip into the real waters. The goal of demo trading for you and for the broker is that you’ll get familiar and open a real account. So that’s good. But wait: being familiar with one broker doesn’t mean it is the best one for you. For the sake of comparison, at least test one more broker. The second test will likely be faster.
I would like to repeat that demo accounts are still of high importance and that also seasoned forex traders should test a new broker with a demo account before making a deposit. It’s just that like anything else in life, a simulation cannot fully prepare you for the real thing.
What do you think? Are there any other pitfalls that you can think of?
Further reading: 5 Most Predictable Currency Pairs – Q4 2011Get the 5 most predictable currency pairs