I take my 3 year old daughter to the pool regularly. I have been doing so since she is 4 months old and I have taught her how to swim. I did the same with my now 8 year old son when he was little. No floaties, no inflatable ducks, nothing, just me slowly teaching them what eventually became second-nature: to paddle towards the edge of the pool. Throughout these 8 years, I have lost count of the number of times parents have asked me “what? No floaties?” They send their kids to the water wearing some sort of inflatable device around their arms or their waist, with a (in my opinion) false sense of safety.
The same principal I believe applies to trading Forex. Demo accounts are great. They are awesome tools to get you acquainted with a platform and comfortable with your trading skills, but just like floaties do, they can give you a false sense of safety that can cost you a pretty penny.
With this in mind, let’s go over what are some of the pros and cons of demo accounts:
Pros:
- Once you have researched and chosen a broker, using their demo account is a great way to get to know their platform. While it is true that most trading platforms are similar, knowing the trading platform like the back of your hand can save you time energy and money at the time of trading. Use the demo mode to learn the ins and outs of your broker’s platform.
- It allows you to get your feet wet. If you are a new trader, using virtual funds, as opposed to your own hard-earned money in order to test how the Forex market works and how other traders buy and sell instruments, can be a great way to learn how to trade without shelling a single dollar.
- Trading in demo allows you to develop your trading strategy without risking your own money
- The Forex market changes rapidly and trading in Demo mode can help you learn to adapt to this challenge and train you to keep an eye on the ever-changing environment.
Cons:
- Because Demo accounts use virtual money, a trader will be less careful about their strategy. After all, the risk of losing fake money with no tangible value in the real world is not as troublesome as the risk of losing real cash.
- Using virtual funds is a difficult way to teach a new trader about how volatile the Forex market can be and how quickly they can lose money.
- The amount of money provided by brokers in a demo account rarely resembles the amount of money you’ll be investing in real life, thus making it difficult to implement a strategy that will easily translate into the real world. I mean, you’ll gladly put several hundred dollars into each of various trades when using virtual funds and let it play out if the trade starts going south, but you’ll be a lot more careful when it is your own money.
- The mere fact that demo accounts trade with virtual funds give traders an unrealistic taste of risk management. Psychologically, there is no way you can make the same decisions when it comes to developing your risk management strategy when using monopoly money than you would when using real funds.
No matter what you do or how much you practice, there is no guarantee that you will earn profits or avoid losses, but if you use a demo account wisely and take it at face value, it can serve as a great tool to help you get your feet wet in the very volatile and dynamic Forex trading market. What’s more, if you use a demo account integrated with automation tools, you can benefit from establishing contact with your broker at key points during your trading sessions.
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