Demo Account – Possibilities

What is a Demo Account?

A demo account is a type of trading simulator or practice account that allows you to practice day trading with a variety of financial instruments, from stocks, futures and options to CFDs and cryptocurrencies.

Demo accounts are funded with simulation money, allowing you to gain trading experience without risking real capital. This allows you to strategize and build confidence while familiarizing yourself with market conditions. In addition, it is an effective way to test a potential broker and software.

Ability

The best demo accounts allow you to simulate real trading with the only difference being that you use fake money. This way you get the full experience of the markets and trading platforms, without the pressure of risking your actual funds.

• Exploration – Testing different financial markets allows you to get a feel for how they behave while finding the right product for you. Trading penny stocks will be different from commodities, for example.
• Gain experience – Before you risk actual capital, you can practice opening and closing positions, plus applying stops and limits. In addition, you can view margin requirements, as well as track profits and losses.
• Charts – Learn how to interpret and use charts, from checking technical indicators to identifying patterns.
• Past Performance – You can analyze past performance to correct mistakes and hone your strategy before you put real capital in line.
• Trading Tools – Learn how to interpret and use information from news feeds and market data.
• Watchlist – The demo account also allows you to identify and monitor the market of interest.

Benefits

Whether it’s forex demo accounts in the UK and Australia or CFDs and spread betting in the US, it all offers a number of benefits:

Familiar

• Risk – Since the demo account is funded with simulation money, mistakes won’t cost you any hard earned capital. Plus, they also let you practice day trading while you’re still saving for that initial account deposit.
• Price Action – The best way to understand price action is to experience it. Stock trading demo accounts, for example, will give you practice in reacting to volatile markets and taking advantage of price movements.
• Brokers & Platforms – Finally, online trading with a demo account is an effective way to test a potential broker and platform. For example, you can check out their software that has all the charts and tools you need. Also, do they offer any useful additions, such as trading contests? So check the overall quality of the broker’s services before you commit real capital.

Strategy

• Calibration – The demo brokerage account is the perfect place to fine-tune your strategy. You can make mistakes and adjust until your plan is consistent, with no real capital loss. Because of over-focus, short profit cuts and directional deviations are all common mistakes that can get costly if you don’t do them in a practice account first.
• Forward Test – Once you have a market and strategy in mind, you can backtest or forward test your trading plan. While backtesting can prove useful, it lacks an emotional element. Forward testing allows you to put your plan to trade stocks, for example, into action while battling real-time trading pressure.
• Drawdown – No matter how effective your strategy is, there will be days when the market feels against you. However, investing in a demo account allows you to practice sticking to your plan and possibly adjust your position size until things turn around.

All in all, signing up for a demo account in binary options or stocks, for example, can provide you with the ideal risk-free platform to develop an effective strategy.

Limit

Before you start looking at demo accounts for trading, these practice accounts have certain limitations:

Physical difference

• Execution – Demo accounts often offer better execution than live trading. This is because demo accounts usually fill a market order at the price shown on the screen. However, in a live market, there is slippage. This can lead to orders not being filled at the expected price. So meeting previous returns calculations can prove challenging.
• Raise capital – Usually, demo software allows you to choose the amount of capital you want to trade. As a result, many individuals make more choices than they would have when they lived commercially. Larger capital allows smaller losses to be more easily recovered. You may also find yourself unable to afford the expensive tools you discovered using a demo account.
• Spreads – For example, online forex brokers often seek to impress potential traders with high spreads in demo accounts. However, in fast-moving markets, in particular, the quoted spreads can be much wider.
• Deposit – Although virtual currency is used, there are some brokers that will require an initial deposit to use their demo account. So here’s something to check out before you sign up.
• Leverage – Many traders prefer to use the increased leverage of some brokers in a demo account. While this can lead to significant virtual profits, in live trading it can also lead to significant losses.
• Reject trades – In a demo account, trades almost always take place on demand, regardless of certain factors. However, when trading live, price changes between your trade and the execution of your trade may result in a rejection. So be prepared to requote when you upgrade to live trading.
• Trading Tools – Free charts and packages you get when you trade gold in your demo account may have extra costs when you trade live.
• Market Volatility – Your demo account host may not take into account interest and dividend adjustments, or overtime price fluctuations.

Psychological difference

• Emotions – The demo account will not leave you with the fear, hope and greed that you may encounter when trading live. The fear of losing your capital can lead to costly mistakes. While greed can lead to holding a winning position for too long. Unfortunately, you cannot practice controlling these emotions with a demo account.
• Claim – Proper risk management with a practice account is often overlooked. Traders often take on more risk than they would if real money were on the line. This can lead to bad habits when you switch to live trading.
• Overtrading – The excitement of trading can make many people with demo accounts toppled. After all, why not risk it when it’s not real money on the line? This can develop into an overwhelming workout routine. However, when you move to live trading, then you will need to learn quantity is not always quality.

To conclude, comparing a demo account with real live trading will highlight some potential pitfalls to take into account.

However, that doesn’t necessarily mean you shouldn’t use a demo account. It simply means that you need to be aware of the risks, so you can prepare for the difference when you start trading with real capital.