Trading forex is not easy, and there is certainly some amount of risk to it, especially if you are brand new to the trading industry. This is why new users are often advised to use forex demo accounts to start things off. In fact, this is why demo accounts exist, although they do have other uses.
However, that still doesn't mean that you should make a mistake and think that forex demo accounts are accurate. They are not, for a variety of reasons. Today, we will comb through some of these reasons and see how forex demo trading differs from live trading.
About forex demo accounts
For those who might not know, forex demo accounts are training accounts that you can make and practice trading. They do not use real money, and so there is absolutely no risk involved. You can use them to test out different trading strategies and get a feel of the market.
You can use them to see how the prices change, test entering and exiting positions, and try to earn some money without investing anything. Of course, the money you will earn will also be fake money that you can't cash out and use, but it is still good enough for practice.
With them, you can learn some basic, but still important concepts that you need to know for trading forex. Things like entering and exiting positions, long and short positions, pips, and alike are all necessary knowledge that you can pick up and test with a demo account.
You can also use them to test a new platform if you decide to move and give a new broker's platform a chance. This is certainly preferable to arriving at a new platform and going live immediately, without knowing which way is up. Lastly, if you wish to make a change in your trading strategy, test out a new approach, and alike — it is always good to use a demo account for such tests than to try them out live straight away.
That way, if they end up not working, you will lose some of your fake money and not have to worry about actual losses. You can learn on your mistakes here, and approach live trading with all the necessary knowledge for avoiding such events in the future when you actually start using real money.
However, you should still be cautious when using them, because it is too easy to forget that they are not so accurate and that things may still be quite different when you start trading live. Let's discuss why that is, and in what way do demo forex accounts differ from live accounts.
Demo accounts vs. live accounts: The biggest differences
1. You do not use real money
As mentioned, one of the biggest differences between demo accounts and live accounts is that you don't use real money when you trade on demo accounts. You might be thinking — why is this important?
This matters because it changes the way you think and approaches your trades. When it comes to demo accounts, you are much more likely to take risks because you know that you don't have anything to lose. This could lead to some risky moves, which you may regret if you repeat them later on, with real money.
2. Demo losses do not feel real
Also, it is harder to develop the feel for the trade for this same reason. Finally, you will not have to face the feeling of losing actual money. After losing fake money in case the trade goes bad, you would simply make a point to be more careful in the future. When you lose real money, that can hit you quite strongly, as you will realize that this is not a game. Your actual money — that you worked for and earned — is gone.
This can be very discouraging for first-time traders, and many abandon trading completely after seeing their first losses. This should not discourage you from trading, but you should keep in mind that it is a possibility and that it will happen. Someone always has to lose in order for someone else to win. Of course, your goal is to be on the winning side as much as possible.
3. Your demo order is always taken
Another big difference is how your trades will perform when you trade on demo vs. when you trade live. Demo accounts are created for orders to always go through. You need to experience the trade and see how the prices are moving. You also need to test out new strategies, and you have no time to lose.
This is not the case when it comes to live trading, where your order might not get taken right away, or at all. This can happen for a number of reasons. If there is low volume, or you just start trading in the time of day when the volume is low, your order might not take.
With demo accounts, this is simply not an issue, which can be quite frustrating for new traders that are just now going live for the first time.
4. Demo accounts are not always accurate
Another thing to remember is that demo accounts are created by brokers who want you to start trading as soon as possible. They offer demo accounts for you to practice and test out strategies, but they can only provide you wish some typical situations, which will not prepare you for all the scenarios.
As a result, the trades that you make while on Demo Account should not be taken as real situations. There are plenty of textbook situations that can take a weird turn in the actual market. The developments do not always follow the rules, and things do not happen as they should.
However, Demo accounts won't prepare you for that. This allows you to gain confidence and move on to the real, live account quicker. However, it can also give you a false sense that you cannot lose, which will, of course, lead to losses as soon as you start putting actual dollars on the line.
5. The emotional difference
When you trade real money, you may often approach without controlling your emotions. This is a trap that many can easily fall into. Whether you are experiencing losses or gains, if they keep coming one after another, you may start getting emotional and taking one risk after another, only for things to end really badly for your funds.
This is not something that you will get when trading with a demo account, as you don't use real money. Therefore, there is no emotional response. Wins mean nothing, as you can't use the money you have won. Losses mean nothing, as you did not invest real funds.
Not getting used to controlling your emotions on demo could end up costing you a lot when you switch to a live account, so keep that in mind, as well. It is always best to remain cold and calculated, and only take risks when the reward is high enough for them to make sense.
6. Other differences
There are other differences between how demo and live accounts operate. This can be very surprising for new traders, who may think that they have everything figured out after a few demo trades. Here are some examples:
- Sometimes a broker won't offer their real trading platform for demo purposes. This means that you will have to get used to the real platform, even if you have already tested trading via a demo account.
- Forex brokers may not requote a price to demo account users, and then often requote them to live account traders.
- Stop-loss orders may execute accurately on demo accounts, but not on live accounts.
- The broker's dealing spreads and price feed may be different for demo and live accounts.
- Live accounts could lead to errors, that may end up costing you time, money, and effort.
As you can see, demo accounts can be very useful, but also a bit misleading at times. You can and should use them for conducting tests, but keep in mind that they are just that — a place for tests and learning the basics. If you are trying out a new strategy that should work well for you, and it does on a demo, it is probably safe to try it out with a small amount on a live account, as well.
If it works well on a demo account, but you feel like something is not right, it is best to not take any risks. Meanwhile, if you are brand new to trading, use demos to get a feel of how the platform works, but keep in mind that things might play out differently when you go to the live account. For you, demo accounts should serve to let you figure out technical aspects of the platform, not to learn the market. Keep this in mind, and you will likely avoid plenty of unpleasant surprises when you finally start trading with real money.
Author: Ali Raza - A journalist, with experience in web journalism and marketing. Ali holds a master's degree in finance and writes extensively about the financial markets and fin-tech industries.