Before any trader starts trading with his own funds, it is strongly recommended that he test his skills and strategy with a demo account. It will help him to understand where he is right and where he is going wrong and he will be able to correct that in the demo account stage itself rather than carry over the bad habits to a real account and losing money in the process. It is generally advisable that a trader spends at least 6 months trading profitably in a forex trading demo account before he makes the switch to the real account.
What is a Forex Trading Demo Account?
A demo account is something that is used for practice by traders who want to get used to the platform and also want to either learn new skills or sharpen their skills or carry out forward testing of the strategies that they have come up with. It has a multitude of uses and it is loved by a lot of traders, big and small, experienced and beginners as well.
It is basically very similar to a normal live forex trading account except that the funds inside the account would be virtual and cannot be withdrawn by the trader. The funds are deposited into the account by the brokers themselves and the order does not get matched with the banks or liquidity providers and hence there is no question of settlement. This is the reason why no withdrawal is allowed for such accounts. It is generally given by all brokers so that the traders can get used to the broker platform and the instruments as well. New traders can use this to test their knowledge and skills and see if they can come up with some good strategy that is profitable in the long run.
The demo accounts are about 90% similar to the live trading environment but it isn’t exactly similar though as the question of liquidity or settlement does not arise in the demo environment. So there are likely to be some small differences between the real and demo account but it can surely be used by traders for testing their skills and their strategies as well.
For How Long Can I Trade on a Forex Demo Account?
Generally, most brokers allow the demo account given to a trader to be working and active for a period of 6 months. Sometimes, it may be more as well while other brokers may also allow you to keep the demo account as long as you continue to trade on it actively. Some other large brokers are very strict about the demo accounts and hence restrict the trading in such accounts to less than a month or so.
But as a trader, it is always good to test out your skills for at least a few months, and hence it is advisable that you take a demo account with a forex broker who allows you to keep it at least for a period of 6 months as anything less would mean that you would be entering the real account trading world with some half baked knowledge and that would not be good for you in the long run.
What Should you Look for in a Forex Demo Account?
There are many things that you should note when you go and open a demo account. First of all, make sure that you open a demo account with a broker with whom you plan to open the real account as well. The reason is that you would want a demo account that is as close to the real account as possible and so it is better to use the same broker in such situations.
Next, see if the instruments offered in the demo platform are the same as those in the real account. In many cases, it is likely to be different and that could lead to confusion when you move into a real account and so this needs to be checked and if it is not the same, you can enquire with the broker and see if they can give similar instruments.
Another important thing to check is the spreads and see if the spreads in the demo account are comparable to the spreads that you are likely to see in your real account. Many times, they are likely to be very different and though this may seem like a small item, this is likely to be very important for those who have precision trading strategies and do scalping trading where a difference of even 0.1 pip can make a whole lot of difference to the results in the demo and live trading.
The speed of execution is also key and don’t get carried away by the execution speeds that you see on the demo platform as it does not involve any trade settlement. It is likely that the trade execution takes much longer in the real account platform and so if your strategy or robot depends a lot on the speed of execution, then it is better that you carry out your testing on the real account platform with a very small account as the demo trading platform is unlikely to give you a good idea.
As we have repeated many times over, it is always good to have a demo account on standby so that you can either test out your newly acquired skills or your new strategy in a quick and organized manner over a period of time. The demo account is useful not only for beginner traders but also for experienced ones as well as they are also likely to feel the need to carry out some testing when they are in the middle of their trading career. Most of the forex brokers offer demo accounts for free and so it should not be a problem for you to get hold of one.