Several forex brokers and experts advise you to practice and hone your forex skills by creating a demo forex account first. A demo forex account is a sort of virtual training program where you get to operate in a totally risk-free environment. Practicing your trading skills in a demo forex account helps you get more familiar with the trading format and helps you develop some basic trading strategies. Today, however, the demo forex accounts are being used to promote the various brokers who want to lure the people in someday opening a live trading account.
While there’s no harm in promoting one’s services, demo accounts have several pros and cons which make them a mixed blessing for people.
Advantages of Demo Accounts
- Opening a demo account is one of the best ways to know how the forex market functions and how traders across the globe buy and sell the various currencies in the world. All you need is your name, address, and a valid phone number in order to create a demo forex account. You do not require any money to open a demo trade account which means you can learn to trade in the forex market without shelling out a single penny.
- Most demo scenarios are based on real-time forex trading situations and you get a chance to get more familiar with the various controls, and the constantly fluctuating prices of the currencies. And since you are provided with virtual money to spend, there is no such fear of losing your hard-earned money in order to get familiar with the trading procedure.
- Demo accounts also help the new traders to take their time in developing new trading strategies and help them set their foot carefully in the constantly changing forex market. You can lose money more quickly than you think in a real-time forex environment and a demo account doesn’t let that happen to you on your first day of trading.
- Training in a demo environment also helps you adapt more quickly according to the constantly changing market environments in the market. The big change in the currency prices makes the forex market one of the most challenging places to trade and one needs to always keep an eye on the changing environments.
Like most modern-day inventions, demo forex accounts are aimed at helping people trade more smoothly with forex. But despite its various advantages, there are certain drawbacks that the demo accounts suffer from.
Disadvantages of Demo Accounts
- One of the major cons of the demo forex account is that it deals in virtual money which has no tangible value outside the real world. You certainly wouldn’t care if you ever lost your monopoly cash, and no matter how real-time the demo account appears to be, it doesn’t really involve the risk of losing real money and that makes the new traders more careless. Unless there is no real money involved, most new traders will never get how volatile of a market that forex is and one can lose more money quicker than they expect.
- No matter how much the various brokers try to tell you the importance of a demo account and how it is the first step to becoming a successful trader, it is nothing more than trial software that only emulates the market. The virtual money provided in the demo forex account is somewhere between $50,000 and $100,000, a sum which I’m sure not many would ever bring to their forex brokers.
- One of the most important trading strategies in forex is the concept of money and risk management. You certainly do not want to put a large sum of money at risk when dealing in an environment as volatile and dynamic as the forex market. The unrealistic amounts of virtual money provided in demo accounts make the user tend to act more careless while making trades and doesn’t help the new trader understand the value of patience.
- Success in a demo account is also not a really good indicator of how you would perform in a real-time trading environment. There are several new traders who might think that they would earn huge profits after making some good trades in a demo account. We must always remember that around 80% of the trades in forex end in losses due to the extremely unstable prices of the currencies.
There are several experts who advise the use of a demo forex account in order to start off as a great forex trader. But forex is one of the riskiest markets in the world and due to the constantly rising and falling prices, there is no guarantee that you will earn profits or not incur losses. Keeping a cool head and not giving in to your emotions is the only way to find long-term success in forex.