The benefits of using a demo account

Pros and cons of a demo account

A demo account is ideal for learning how to trade for free and without any financial risk. However, it doesn't replace your need to develop the qualities that will make you a successful trader: discipline, humility and a calm disposition. Here are the main pros and cons of demo accounts.

 

The benefits of using a demo account:

1. It allows you to see how price action develops and understand the risks inherent in leverage

In general, new traders are impressed by two things. The first is that the forex moves relatively little compared with other asset classes such as stocks or commodities. However, they are also impressed by the potential for huge price fluctuations when using the very high leverage offered by forex brokers, especially when important economic announcements such as interest rates or the NFP are published.

The demo account should allow you to understand that leverage is a double-edged sword, you can make lots of money quickly, but you can also lose everything on a bad trade. Professional traders rarely use leverage higher than 5: 1, while forex brokers offer leverage as high as 500:1. (See our article on leverage)

2. It allows you to understand how the platform works and get a feel for the broker's trading conditions

The demo account is key to learn how to place orders, configure the various types of charts for technical analysis, finding out the various contract sizes, the margin used depending on the leverage, etc.

3. It allows you to develop trading strategies

The most popular trading platform among retail traders is MetaTrader 4. The demo mode offers live quotes from all markets and a virtual portfolio to train under real market conditions. You can therefore learn to analyse price action, chart figures, support/resistance lines, the correlations between currency pairs, see how volatility changes depending on the market's hours and the various assets, and thus develop your own trading strategies. You can also test automated strategies with historical data and optimise your settings.

You will see that the profit potential is huge, but if you don't use strict risk management rules you can lose all of your money very quickly.

 

The drawbacks of using a demo account:

1. You will not develop the healthy fear you need to succeed in trading

Even if you managed to make money with a trial account, you will not necessarily be a good trader. In a controlled environment where losses mean nothing, emotions related to losses and even profits have very little influence on your decisions. So you will also need experience in the real world in order to understand and control the psychological aspect of trading. Your first real account should therefore be opened with a relatively modest sum of money, because you might lose everything, it's the price to pay to get full training.

2. You can develop complacency or develop bad habits

Demo accounts can create a false sense of confidence. Traders generally have a hard time managing risk properly with a demo account. They also tend to take more risks than they normally would with real money and this approach to trading can lead to bad habits.

3. You won't see how you will really act when you are risking real money

Cut your losses quickly and let your profits run! This saying is true, but in practice, this is often very difficult to implement with a real account. The hardest thing to do when trading is not finding good entry points, but knowing when to get out. Once again, when the psychological aspect comes into play, it is very easy to take profits, but when it comes to taking losses (which could turn into profits), it's a different story.

 

Conclusion

Trading with a real account enables you to clearly see that it is essential to have discipline in order to manage risk. On a demo account, discipline seems unnecessary and the placement of stop losses is often seen as something that prevents you from making profits. A trader using a real account is aware that these two aspects are equally important, if not more, than a strategy that shows entry and exit points.

However, even if demo accounts don't enable you to develop the psychological aspect of trading, they are essential to learn trading, how trading software works and how to develop strategies for free and without financial risk.

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