With a Forex DEMO account you can try out Forex and see if that trading is for you anyway. Very convenient and safe, at least, it seems. Most brokers always advise new traders to start with a DEMO account. ForexMentor agrees with this, but with a considerable comment.
Trading through a DEMO account costs you nothing at first. You just have to open an account with a broker, install the software and within five minutes (literally!) You place your first trade. You can place trade orders to your heart’s content and discover the software.
About That Software
Most traders use the Meta Trader 4 program. This software makes it possible to quickly place trade orders through your broker’s tradancount. Good brokers often have their own platform to place these trade orders, but these usually offer far fewer options than the MT4 software.
In 2010 the developer of MT4 released another version of the software: Meta Trader 5. Because of the chosen name and especially the number, the Meta Trader 5 seems to be an improved version of MT4, but it is not! Meta Trader 5 has been developed for a market other than the Forex market, namely for shares and commodities (oil, grain, gold). Also for a DEMO account, Meta Trader 4 is the best software to work with.
How does a DEMO account work?
The name might suggest that a DEMO account gives a demonstration of how Forex trading is going, but in fact it does not. The software only does what the user (you) indicates that must happen. You can place trade orders, share prices and view graphs and use all kinds of tools to gain insight into the price trend of a currency pair.
If you at least know how everything works! You do not know that yet (you just start) and so most novice traders will mainly focus on placing trade orders.
It is all real!
The Meta Trader 4 software does not distinguish between accounts. Whether you log in with the details of a real trade account or a demo account, the software works exactly the same. Your broker (or you) adds the balance to the DEMO account and you start trading.
You see exactly the same as what you would see when trading with a real money account. The costs that are calculated per trade are the same and your profit or loss is calculated in exactly the same way. The prices shown are also the current prices of that moment.
It therefore seems that an environment has been created that is identical to the actual situation. Yet that is not entirely the case. Those who are not careful can, even wrongly, use a DEMO account at a later stage (if you are trading with real money) even lead to losses due to misuse of the DEMO account.
DEMO Account Pitfall # 1
While opening a DEMO account, a standard amount of fictitious money is automatically added to your DEMO account. With one broker that is 5000 dollars, with the other 10.0000. Realistic amounts for professional traders, but not for people who are just starting out. In practice they will often start with 100 or 200 euros.
Because your DEMO account has access to a large tradi balance, most traders will also place hefty trades and thus quickly make enormous (fictitious) profits or suffer losses. What the tradesaldo after 5 trade orders also is, does not seem to matter: it is only fictional money!
Nevertheless, when using a DEMO account, it is indeed a factor that is lifelike, namely the reasoning that follows with loss and profit:
At profit: ‘Too bad it is not real money’
In case of loss: ‘What does it matter, it is only fake money’
Two understandable reactions that also sound like a bleeding finger. However, it is also reactions that you will not have when trading with real money! Your profit will be real and your loss will certainly make a difference!
The height of the fictional trades balance that is often used by starters is usually unrealistic. Starting traders do not start with a trades balance of 5000 euros. The results of the fictional trades are therefore also not realistic. While that is precisely the intention of such a DEMO account!
DEMO account Pitfall # 2
A football stadium that is filled to the brim. An absolute winner. The whole world is watching. You are not physically there, but follow everything closely through the LIVE images on TV.
What an atmosphere! What a people!
The smell of the grass, the intense sounds, the tension that is passed on from supporter to supporter. What a great atmosphere, and what a solidarity. Man, man, man, what would you have liked to be there!
Trading with fictitious balance can be compared to a top match on television. You feel the atmosphere, the tension and the emotions, but they are just a bit different than if you were in the stadium.
Whether you place more profitable or loss-making trades on average, the emotions you undergo are also a bit less intense than when you trade with real money.
With a hefty profit on a first trade order, you will initially react euphorically. With the fifth or sixth profitable order, that euphoric feeling is already a lot less. After 20 profitable trades, with most traders on a DEMO account, that euphoric feeling will almost completely disappear. Even if the fictional profit, for example, is 4000 or 8000 dollars.
And that is anything but realistic ….
When you start trading with real money, every profit and loss evokes a certain emotion. Not only the first, fifth or tenth profitable order, but also the fiftieth or five hundredth! The same applies to loss-making trades. The first loss-making trade will be just as annoying as the 500th.
One of the golden rules in Forex trading is that you minimize your emotions play a role in placing trade orders. Successful trading starts with placing trade orders on the basis of knowledge. You do not place a trade order because you ‘hope’ or ‘feel’ that the course is heading in a certain direction.
By using a DEMO account, it is not possible to learn how to handle and anticipate feelings that arise during trading. You only practice in operating the software, the process of trading and not in one of the most important conditions for successful trading: dealing with the emotions during the trade.
Make your DEMO account Realistic!
Every starter is wise to start with a DEMO account. You now know which pitfalls are involved and so you are wise to create a realistic DEMO environment.
Once you start trading with real money, you will probably start with an amount between 100 and 500 euros. Let’s assume that you are a cautious type and keep 200 euros. In that case you would be wise not to use more than 200 euro fictional trades balance in your DEMO account.
That is a realistic amount and will also lead to fictitious profits and losses being realistic enough to get a picture of what Forex actually means. The emotions that develop will also be a lot realistic, than when you try something with a trades balance of 5000 euros.
If you do not do this, then there is a very good chance that if you end up trading with real money, you will lose a lot of money first because you know how the software works, but you have not really practiced realistically in the trading itself. Practicing with a DEMO account will then ultimately have delivered nothing and even cost you money!
Tips for dealing with a DEMO account
- Choose a broker where you can specify your fictional trades balance
Brokers where this is not possible always use amounts that are not realistic for starters. With EXNESS you can set this all by yourself, with MARKETS this is (unnecessarily) via customer service.
- Do not trade with a DEMO account for too long
You start a DEMO account to try out Forex, right? Turns out Forex is something for you, climb on that horse and go! Waiting too long can lead you to trap # 1 or pitfall # 2.
- Keep using your DEMO account even after you’ve started the real work
Professional traders also use DEMO accounts. They use these to work out strategies. Even if you start trading with real money, you should also continue to use the DEO account to practice and process new insights that you gain.
Keep track of your profit and loss from your DEMO account in a notebook, spreadsheet or Word file.
As soon as you start trading with real money, you will (hopefully) also start doing this. If you start with your DEMO account, you will immediately develop a system of notes that you can work with and which suit you.
Always keep in mind what you are actually doing: practice and try if Forex is something for you. If you are not sure if that is the case, just do not start it. Do you think that Forex is also something for you, do not wait too long to start. Keep practicing, but also just act.