Google 'forex broker' and you'll see there are a lot to choose from. While their online services can differ, one thing common to just about every FX broker brand in Jordan and elsewhere is the availability of demo trading accounts.
Demo accounts have become a standard way for brokers to encourage traders to try out their deal execution services.
They give prospective clients a hands-on demonstration of what it feels like to trade against currency price movements with that broker – but without putting any real money at risk.
While using a trading demo account has a lot of potential benefits, there are also potential drawbacks. The experience of executing a demo trade can differ significantly from the experience of live forex trading – along with the intense emotional responses that come with it.
Because demo account conditions are virtually risk-free – e.g. you're only trading virtual money – the stakes are lower. That makes them very different from a real-money funded account. Brokers may impose time limits and fixed virtual deposits, or make the experience more optimal than it might be in real life.
Here we delve a bit deeper into Forex demo accounts, and their significant pros & cons.
Forex Demo Accounts: What they’re all about
Most online forex brokers will give prospective new clients a free demo account to new or prospective clients, and allow them to practice trading with virtual money.
Both novice and veteran traders use demo accounts regularly to practice trading, try out a new trading strategy, or trial the services of a new broker.
Demo accounts typically give basic access to the broker’s additional services and customer support, so you can experience what dealing with the company will be like once you commit real money in a live trading environment.
When you first open a demo account, the broker will typically let you fund your account with a set amount of virtual money, and ask for some personal data to complete your account registration.
In some markets, data collection may be a regulatory requirement. In all cases, the broker wants to be able to contact you for marketing purposes, as well as to provide adequate customer support – even for your virtual trades.
- See if You Like It – If you’re new to trading currencies or just interested in seeing what it’s all about, a forex demo account is a great way to test whether or not you’re mentally and emotionally suited to the pace and stresses of the forex market.
- No-Risk Trading – If you're new to trading currencies, you'll likely feel more confident putting actual cash at risk if you can kick the tyres first. A demo account lets you put their training into practice in a close-to-real-life environment without putting their real money at risk.
- Learn Money Management – A demo account allows a new or experienced trader to practice money management techniques against real exchange rate movements and see for themselves how the typical benefits accrue (or not).
- Manage Your Emotions – Managing normal psychological responses like fear, greed and aspiration can be difficult when the adrenaline rush of live trading takes hold. Demo trading can help new traders learn the discipline of trading with the head, rather than the heart.
- Test Your Trading Strategy – Seasoned traders use demo accounts to give new trading strategies a trial run before implementing them against real exchange rate movements. This provides an opportunity to get accustomed to the opportunities and limitations of the system and see if any bugs need to be worked out.
- Trial New Features and Services – Demo’ing a brokers trading services be a great way to check out breadth and quality before committing real money. You can see first-hand if the delivery lives up to the promise.
- Limited Virtual Funds – Many online brokers will restrict the funding of a demo account to the amount it was initially set at, meaning no more virtual funds can be deposited into the account if you ‘lose’ the initial sum.
- Fixed Duration – Some demo accounts only allow you to practice trading for a fixed period, after which they expire. This can result in your demo trading track record being terminated before you’re feeling comfortable enough to go ‘live’.
- Re-quotes May Not Reflect the Realities of Live Trading – Some online brokers wanting to hook new clients might reduce or even eliminate re-quotes from their demo systems. In practice, re-quotes are a fact of life in forex that every trader needs to become accustomed to.
- Order Execution Times May be Faster – Since demo account trading doesn’t involve sending real transactions to the market, demo trades can happen faster than you would see in a live account -- where execution times depend on market conditions and may involve one or more re-quotes in fast markets.
- Demo Spreads May be Tighter Than Normal – A forex broker looking to hook in prospective new clients might put forward demo account spreads that are artificially tight. In reality, the actual dealing spread could be considerably wider, especially in fast-moving markets where exchange rates fluctuate rapidly.
- Over-trading Addiction – The thrill of the trade can sometimes be intoxicating, and that can cause traders to take excessive risks, entering new positions, for example, when they should be waiting and observing.
- Bad Habits Without Consequences – Demo trading can help you avoid mistakes, but without real money at stake, the lessons may be learned more slowly. Demo trading can contribute to sub-optimal trading habits that will need to be overcome when you move to a live environment with real money on the line.
Despite some drawbacks and differences between brokers, it's sensible to see demo accounts as an overall positive.
Whether you’re new to forex trading or a seasoned investor checking out a new trading strategy or broker service, demo accounts can be a helpful way to conduct a test run without worrying excessively about potential losses.
Everyone should be aware of forex demo trading’s common drawbacks and try to compensate for them.
but overall, demo accounts deserve a place in the forex trading toolbox. How much and how often you rely on them is up to you.
This article is written by Dave Griffiths.
Financial services blogger and experienced FS Head of Digital Dave has worked in digital 10 years in client-side, agency-side, and self-employed capacities. He now writes engaging content and creates innovative digital strategies for the finance and tech industries. He is the creator of Enviroute - A new travel app which is currently seeking investment. Dave spends more time than he cares to admit watching skateboarding videos and likes to express himself through the medium of internet memes!