Most of the best forex brokers on the market offer potential investors the option of opening a demo account in order to try out their trading platform and features before taking the final step of opening a live account and depositing funds. While a demonstration account is a great way to get a taster of the experience of choosing a specific broker, there are some downsides to using one. In this article, we look at the advantages and disadvantages of opening a forex demo account and outline how best to make the transition from a demonstration account to a live trading account.
What are the Advantages and Disadvantages of Using a Demo Forex Account?
For novice traders, a demo trading account can supply a valuable insight into the world of forex trading and can give beginners the confidence that they need to start trading for real. When used correctly, a demo account can be a useful training tool that will give them the necessary basic knowledge and skills that they need to get up and running. A demonstration account can be set up free of charge and only requires the potential investor to enter a few basic personal details. Access to this account enables the trader to get to grips with the trading platform without putting any of their finances at risk and allows the investor to see how to trade in real time, viewing the impact of fluctuations in price upon their account. Even more experienced traders can benefit from using a demo account as they offer a great opportunity to try out a new trading strategy in real time in a genuine trading environment and actual market conditions without taking any financial risk.
Nevertheless, there are some disadvantages to using a demo account. One of the major issues with demonstration accounts is that they cannot train an investor in the best way to manage their money. Most practice accounts come pre-filled with up to $100,000 of virtual money and this is hardly a realistic basis on which to begin. Most novices begin their foray into real-world forex trading with a Micro or Mini account which will involve depositing much smaller sums of money than this. These enormous virtual sums encourage investors to try their hand at much riskier trades than they should and this can become a habit that is hard to break after transferring to a live account and which can cost the novice investor dearly. The use of virtual money also protects the investor from the knowledge that they are risking their own hard-earned money when they make a trading decision. Therefore, a demo account cannot ever recreate the pressure of real-life forex trades and actually impairs the novice’s understanding of underlying risks.
How to Transition to a Live Account
Transitioning from a demo account to a live trading account can be a steep learning curve, and a novice trader cannot expect to be incredibly successful immediately. It is not unusual for potential investors to have great success when using their demo account only to fail to make a profit as soon as they transition to a live account, and this is because the pressure has increased with real money on the line. One of the keys to transitioning successfully from a demonstration to a live account is to resist the urge to trade quickly and to take your time. Money management is essential at this stage, and every investor should set a maximum daily trading amount for themselves in order to not overstretch their finances.
Objective thinking is very important, and it is vital not to let emotions get in the way. A clear head is the best way to successful forex trading, so developing a defined trading strategy and plan before leaping in is the best way to avoid spectacular losses. Limiting early trades to small values and only opening a Micro account that allows low deposits is the best way to start. Wise investors will use a demo account for around three months to hone their strategies before moving onto a live account. This is an adequate amount of time to see consistent virtual profit and to develop all of the necessary skills that will be so vital to a trader’s success in the real-world markets. Here are some key points to remember when transitioning:
Accept that losses are inevitable at some point – use losses as a learning curve.
Never risk money that you cannot afford.
Remember to take all of your trades into account across the course of the day rather than focusing on a single trade. If you are maintaining a risk reward of 1:2 or greater, you are being successful.
Spend enough time practising with your demo account to develop clear strategies before committing any funds to your live account.
Pre-plan your strategy to avoid making emotional decisions.
If you follow these guidelines, you will find the transition from a demo account to a live one less stressful and more profitable.
Post by Konstantin Rabin of Top Rated Forex Brokers
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