Demo currency trading is recommended as the way to start by just about everybody, including us here on this site. Trading in a demo account allows you to get to know your broker’s platform and services, discover the strengths and weaknesses of your system and figure out your own strengths and weaknesses as a trader at the same time.
Nevertheless, forex demo accounts do have some disadvantages. Let’s see what to watch out for and how to avoid the traps.
1. Differences between demo and real money trading
We tend to assume that a demo account and a real money account from the same broker are going to look the same, offer the same services and work in the same way. Usually this is true. Unfortunately however, in a small minority of cases, there are significant differences between the two.
Occasionally you might even find that the demo accounts are managed on a completely different platform. The broker could have many reasons for doing this. Legitimate reasons would include freeing up the real platform and its server space for live traders.
Sneaky reasons would involve tricks like drawing you in with something that is easy to use and maybe even stacked in your favor (if it does not access the real market) so that they can grab your money and then watch you lose it in the real world.
Whatever the reason, this is something to avoid. Clearly in this situation the demo is useless for preparing you to trade with that broker. So check before you sign up.
2. Different mindset
Naturally, it is tempting to use a demo account in a very different way than we would if we were dealing with real money. People often jump into demo currency trading as if it were a game.
Forex trading is not a game. The way to learn to do it well is to study and to create a demo situation that is as close as possible to the situation you would be in if you were trading for real right now.
So it is important not to max out the leverage, open trades at random and play with ten different currency pairs in demo. Anyone who does that is wasting the opportunity and is likely to crash and burn when they start trading for real.
3. The stress factor
However careful you are to make your demo currency trading seem as real as possible, there is still a major difference which you cannot artificially recreate, and that is the impact of stress.
Stress is a physical reaction to a situation where we believe ourselves to be in danger. It kicks in for psychological, emotional and financial dangers as well as physical dangers. It prompts us to take fast and extreme action to avoid the perceived danger. This can often lead to bad decisions made in the heat of the moment.
It is hard to avoid stress in real trading and it is not a great idea to try to create it artificially in demo, so all you can do to prevent this becoming a problem is to start small when you do go live. Then increase your position or your risk gradually.
If you act in this way, demo currency trading can be a very useful preparation for the real thing.
