Sun 31 Jan 2010
The forex demo account is very popular with traders. Many see it as a risk-free alternative to live trading where skills can be acquired, and some even regard it as a medium where a trader's potential for trading forex can be established. These are misguided approaches, and here you'll find why.
1. The forex demo is a game
Let's first remember that a forex demo is just a game. There is no risk involved, no money involved, and the virtual capital granted is usually a very sizable sum. The natural consequence of this configuration is that it is not possible to learn how to manage risk in forex trading through a demo account. It's main purpose is familiarizing yourself with the basics of trading.
2. ...and as a marketing tool.
The demo account is created for the sole purpose of marketing by the broker. It is designed to be very forgiving and generous to traders in order to convince them that trading is easy after all. Yet marketing techniques rarely care about facts, and the same is true in the case of the demo account as well.
3. It is useful for educational purposes
In short, the demo account is great for basic lessons on what the various concepts in trading are (such as pips, the various order types, the behavior of indicators, etc.) but it is nothing more than that. Any attempt to base real trading decisions on the demo trading experience is almost to certain to generate highly disappointing results.
5. Do not be too excited by demo trading. Test your skills with a mini-account.
Demo trading is for literacy. The mini-account is for literature. Do not confuse the roles of these two concepts in the education process. One can trade with the mini-account for a lifetime, but the demo approach should be abandoned as soon as a decision to engage in live trading is made.
Forex software can only be tested in live trading. Trading skills can only be monitored or evaluated in a risky environment. It is not possible to simulate market conditions effectively in the vast majority of cases not least because humans demonstrate fundamentally different behavior patterns under differing risk patterns. So do not delude yourself by your results in a demo account: it's a marketing tool, and the only way of knowing how good you are, or how well you will be, is trading with real money in the real market, even if you find it unpleasant. If you don't like risk taking, you should not trade: there's no shortcut to a risk-free trading experience.