What is a demo account?
One way of looking at a demo Forex account is as an account to practise trading. You will need to apply to a broker to open a demo account. The broker will normally want to know who you are as part of this process. The main thinking behind a demo account is to allow you to try out the trading facilities before committing to a broker and a trading platform. Many brokers in the Forex community use MetaTrader 4 as their trading platform. Once you have applied for the demo account, your next step is to download and install MetaTrader 4.
MetaTrader 4 is free software and is probably the most widely used trading platform amongst retail traders. With a demo account, you will be given a sum of virtual money for your virtual trading. You can choose both the amount of money and the currency for your virtual trading funds. Your demo account has live access to the markets and provides real time pricing, allowing you to enter and close trades without any risk of financial loss. You can become familiar with the look and feel of the software in your own time. There are some pros and cons in using a demo account. One of the negative aspects of a demo account is that it is not real. This is simulated trading. There is always one significant element of a trade that is absent.
Money. Sure, you won’t lose any money. But you won’t make any either. Money is the single most important element of trading, as it is inextricably linked to your emotions. By not having an emotional involvement, you will be prone to do things differently in a demo account to a live account. My personal view is that you must understand trade sizing and risk management before you start trading. With this understanding, you should consider using a Forex micro account for your practise, staking the minimum amount of money allowed. Yes, you will take some small losses. At least, you’ll know what it feels like and how you behave under those circumstances and you’ll learn to recognise the part your emotions play in trading far more effectively.
Having said that, a demo account can be a useful way of testing a new strategy. For any testing, you will need to be very disciplined and record your results as if you were trading with real money. A demo account may also be helpful as a training tool. If you don’t have and understand some clear trading strategies, you shouldn’t waste your time playing with a demo account.
No realistic strategies, or trying to work one out as you go along means you shouldn’t be considering trading. A word on addiction. I’ve met people who have become addicted to their demo accounts and have been using them for months and months on end. The turns the demo account into nothing more than a glorified computer game. They are no nearer to trading now than they were at the outset. A demo account can never be a substitute for training. By all means, use a demo account to become familiar with the trading platform. Realistically, how long will that take? A day or two? Maybe a week? It shouldn’t be any longer. Many brokers apply a time limit on their demo accounts, meaning they become inactive after a month or so. If you reach this time limit, maybe trading is not for you.