Pretty much all brokerage sites give users the option to practice forex trading in a demo environment with no actual money at stake. It’s a fantastic way for would-be forex traders to get a feel for forex trading and hone their skills before they take the plunge, so to speak, and begin live forex trading.
Moreover, we highly recommend demo trading to those who are new to forex trading because it simulates the process of live trading while eliminating the risk factor. However, it is important to be aware of some of the differences between demo forex trading and live forex trading.
Some users, who’ve perhaps been demo forex trading for some time and deem themselves ready to begin live forex trading, find that when they make the transition from demo trading to live trading, they find themselves unable to replicate the successes they were enjoying while demo trading. Why is this?
Demo forex hero to live forex zero
Well, there are a plenty of ways live trading differs to demo trading, both literally and psychologically. Let’s examine some of these so you can avoid going from a forex trading hero on demo mode to a forex trading zero on live mode.
First, it’s important to note the mental differences between trading with fake money to trading with real money. You’re much more likely to take risks in demo because, even though you may tell yourself that you’re treating you’re pretend funds like real cash, it’s impossible to replicate the feeling of hedging your own hard-earned cash; that’s just a fact.
How to demo forex trade
So, when demo trading, we would recommend focusing less on trying to make the biggest gains you can and more on just getting a feel for the interface, understanding how the various options work, and observing currency trends.
There’s no prize for turning your fake $10,000 on demo into a cool million. In fact, doing so could even hurt your trading skills because making these sorts of gains in demo may cause you to begin live trading with unrealistic expectations. And some traders, when struggling to match the successes they experienced in demo, take silly risks they wouldn’t otherwise have taken and end up getting burned.
This stuff is all trader-related. The other category, if you will, of how live trading differs from demo trading is best described as execution-related. These are ways that live trading genuinely differs from demo trading in ways that are quantifiable. Below you’ll find a relatively comprehensive summary of both.
TOP TIP: Use demo forex trading to familiarise with whichever interface you are using, get used to the jargon and the options being offered etc., and observe market trends. Do not use demo forex trading to try and see how much fake money you can earn, unless, of course, you’re doing so purely for fun. In which case, have at it!
Trader-related differences between demo/live forex trading:
• A possible lack of emotional commitment when no real money is at stake may create an unrealistically positive trading environment in demo trading that is not found in live trading when the trader’s funds are on the line
• A trader’s failure to stick to their trading plan has no real consequences; as a result, a trader may develop bad discipline-related habits that can cost them money when trading live
• Traders might be tempted to overtrade or insufficiently evaluate risk when trading in a demo account; this behaviour can lead to seriously bad consequences when make the switch to live trading
Execution-related differences between demo/live forex trading:
• A forex broker may never requote a price to a demo account trader, but they might often requote live prices in actual practice
• The broker’s price feed and dealing spreads for demo trading may well differ from the pricing that is provided for live trading accounts.
• The broker may execute demo stop loss orders accurately, but considerable slippage may occur in a live trading environment.
• Broker errors that sometimes arise when trading can cost a trader considerable time, effort and even money when attempting to resolve them via the broker’s customer service department. Most traders would not observe or would ignore this phenomenon when demo trading
• Sometimes a broker will not offer their real trading platform for demonstration purposes. This can mean that the trader needs to learn and acclimate to a new platform when switching to live trading
Fund a micro forex trading account
One good way to prepare yourself for the pressures of live forex trading while minimising risk (but not eliminating risk entirely, as with demo trading) is to open a micro forex trading account, i.e., an account which is funded with real money but only a small amount. By doing this, you’ll avoid most of the execution-related differences described above, while replicating the sting/buzz of losing/making real money. It’s win, win.
To summarize, demo forex trading is great for some things but no so good for others. It’s great for familiarising yourself with the various interfaces on offer while getting a feel for the market and learning the jargon. Every interface is slightly different so even experienced traders will sometimes have a play in demo if they’re trying out a new brokerage site/console.
However, demo forex trading undoubtedly has its shortcomings. These can be split into two categories: trader-related and execution-related. Both of which can detract from the positives which can be gained from demo forex trading. As such, we would suggest opening a micro forex trading account, funded with just a fraction of what you ultimately intend to invest to replicate the feeling of live forex trading.
Remember, there’s nothing quite like the feeling of putting up your own money so exercise caution when making the leap from demo/micro forex trading to live forex trading and, as always, don’t hedge more than you can afford to lose.
Thanks, and happy trading!