Forex trading has gone a long way from being a less popular activity to a major phenomenon. It is a method of earning additional profits if you do not back from hard work. As time passes we see even more traders who are involved in this activity.
As technology evolved, rookie traders got the chance to learn more by various new innovations. A demo account is one of them. However as helpful as it might be there are some dangers and in this article, we will talk about them.
What is a demo account and what is it for?
A demo account is a virtual account, a kind of simulated one of a trader’s work on the exchange. It is usually used by newcomers. They need it in order to gain skills in the stock, foreign exchange or commodity markets, without risking their real money. However, it is sometimes used by experienced traders to work out a new trading strategy. The money on the demo account is virtual. They cannot be withdrawn from the account even if the trader has made a fortune on it. So it is a great educational tool.
Real and virtual emotions
A person who decides to try himself as a trader should first use a demo account to understand the principles of the market and form his trading strategy. Everything seems to be simple and clear. However, trading on a demo account is fraught with many pitfalls.
When we talk about the disadvantages of a demo account, first of all, these are dull emotions. Acquiring the skills of working on a demo account, a beginner does not experience such strong emotions as a professional trader experiences when trading real money. This is one of the main arguments that can be seen by people who have tried to learn from it in the past. This is one of the reasons why people get XM bonus account in 2020 for example, as the broker provides the funds itself and sort of creates this risky environment for the traders while not forcing them to use their own funds. For a trader, it’s just some kind of simulator. He uses it to train himself by opening and closing trades without risking anything. There is simply an interest in something new and the excitement of making virtual profits. However, the higher the degree of risk, the greater the reward for it, and in this case, the level of risk is zero and, accordingly, the reward is equal to zero.
It is always advised for you not trade on demo accounts for a long time, since when turning to real trading, it will be difficult for a trader to rebuild both morally and psychologically. Trading on a real account causes a storm of emotions, which can be extremely difficult to cope with. Therefore, after switching from a demo account to a real one, many traders quickly reset their balance to zero. And losing real money is much more difficult than virtual money.
In addition, the trader must know technical and fundamental analysis. And he must also have nerves of steel in order to successfully trade on a real account. At the same time, the ratio of knowledge and the ability to control oneself should be 15% to 85%, respectively.
Trader margin of safety
When training on demo accounts, you need to decide on the amount of money that a trader is willing to risk in real life. It is also worth considering your emotional range and correlating it with the value of this amount. In other words, the more, for example, a trader has shares and the price for them falls, the more difficult it is for him to control himself. Conversely, the fewer shares he has, the less emotion he experiences when their prices fall. Therefore, a novice trader should determine for himself an acceptable and psychologically comfortable value of the risk level. Only the trader himself can determine his psychological state in a particular situation. The secret of successful trading lies in a person’s self-control and ability to control himself in any non-standard situation. These skills will reduce your risk of capital.
Basic rules for trading on a demo account
1. The amount of money to play on a demo account should not be more than the amount of money that the trader is willing to withdraw when trading on the real market. Using large amounts on a demo account, a trader can lose vigilance and control over the situation, moving on to real money.
2. It is necessary to establish such sizes of positions in which the trader will emotionally feel more or less comfortable.
3. A trader must understand the difference between real and virtual money. When trading on a demo account, you need to forget that the money is not real and try to imagine that it can really be lost. This will teach the trader to “keep himself in hand” in the future when switching to a real account when real money is at stake.
4. It is necessary to find a competing trader in virtual trading. This will emotionally revitalize the learning process, teach you to be careful and carefully analyze your actions. In general, the results of trading depend only on the ability to cope with oneself in a difficult situation and, of course, on the knowledge and skills gained while working with the demo version of trading on the market.
Updated October 11, 2020
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