Nowadays, demo accounts are all the rage in online forex trading. Both newbie and experienced traders alike make use of them for the opportunity to be in a simulated trading environment where they can explore the market and experiment with different trading strategies. While such accounts help to prepare you for live trading, an important question needs to be asked: Can forex demo accounts serve as a great indicator for investing skills?
There are some traders that can trade profitably when using a demo account but suffer some losses when they move to live trading. Why is this so? There are many explanations for this.
For one, demo accounts generally provide a better execution of trades. In live trading, it’s a common occurrence that when an order is placed, it’s not filled at the price that’s initially showing on the screen. This is what’s termed as “slippage” in the fx trading world, and this happens especially to large orders, which are often acquired for a different price than what was first indicated.
Another advantage demo accounts have is that they provide the trader with more capital than what actual funds he has on hand. But while having a large capital can mean more trading opportunities, it can provide a false sense of security. Having a large capital means any possible losses can be easily recovered, and this can make you get used to having a safety net. In live trading, you will quickly find out that there is no such security.
Another thing a demo account cannot prepare you for is the overwhelming emotions you’ll experience when you finally start trading. Fear, excitement, anticipation, greed—these are all the feelings you’ll get when trading with real money, which you won’t necessarily get when you’re trading with virtual funds. In short, it’s all fun and games until the fear of losing your own money starts to set in. And when real money is on the line and its potential loss can wreak real havoc on your finances, so much more is at stake.
In conclusion, forex demo accounts might not necessarily indicate a person’s investing skills. However, there are ways in which you can make demo trading more realistic:
1. Make your assumptions about bids or offers as realistic as possible. For instance, if you see that the bid or offer was one cent higher or lower than the move, you’ll have to make your own adjustments and assume that the order was not filled.
2. Keep slippage in mind. Assume a minimum slippage amount of at least one cent, especially on stocks that trade in high volumes. For lower volume stocks, or those that are more volatile, expect larger slippage.
3. Pretend you’re trading with real money and monitor the different emotions you feel while you’re doing so. Demo accounts offer no real risk, so it is up to you as the trader to insert a sense of loss or profit into the process. Moreover, being aware of your feelings can help you learn to control them better so you’re not easily swayed by them.