Forex trading is probably the only market where prospective traders can test strategies and systems without risking their money. In other markets like the stock market, investors have no room for error.
So, they must learn everything before getting started. With forex, you can learn on the job, but with fake money. This is done using a practice account, popularly known as a forex demo account.
So, what exactly is a forex demo account?
Generally, a forex demo account is a trial account funded with a specific amount of virtual currency. Some best forex brokers offer a specified amount, mostly $50,000 while others have a list of options, which range from as low as $1,000 to as high as $100,000. This means that traders can choose the level of account to use for practice depending on the amount they plan to invest in a real forex account.
Also Read: Best Forex Brokers that Offer Demo Account
On the other hand, a real account is not pre-funded by the broker. It comes with a zero balance, which means that the trader must make a deposit in order to start trading. But that is not the only difference.
The differences between a real account and a demo forex account
There are several reasons why differences occur between a real account and a forex demo account. One of the key factors contributing to this is that brokers are required to pay a certain fee to access data feed from the live market, which they can then provide to traders trading on a real forex account. As such, this can cause the differences below to occur.
Delay in order filling
When you are trading via a forex demo account, orders are filled automatically. There are no delays or no-fills. Every order placed is executed immediately because it does not matter whether there is another person on the other end of your request to fill it.
On the other hand, the situation is quite different when it comes to a real forex account. Here, brokers fill trader requests by submitting them to their liquidity providers, which include banks and large institutional investors. If there is no one at the end of your order ready to fill it at your requested rate (especially non-market orders), then the chances are that you will experience a delay before your order is taken.
Also Read: Types of Live Forex Trading Accounts
Slippage in price
Because orders are filled depending on the prevailing prices in the live market, sometimes slippage will occur. Market slippage is a situation where the price of the asset jumps the preset trading conditions like stop-loss after a price gap or a massive instant change in the price of the asset.
Since the data feed for a forex demo account is simulated, traders do not experience slippage in their open positions, which makes it easier to execute certain trading strategies as compared to when trading via a real forex account.
Most brokers that provide their services as market makers do not charge a described commission on trades. Instead, they take a percentage of the spread on every trade completed. This bumps up the spread offered on currency pairs like the EUR/USD, and USD/JPY by a few pips, which are then used to cover service costs.
And in the case of True ECN Brokers or STP forex brokers where liquidity is sourced directly from a pool of big banks and institutional investors, they offer floating spreads, which means that they can change at any time. This is different when trading on a demo forex account because spreads don’t change, which makes it easier to execute various trading strategies with a higher degree of success.
Proof of identity and address
Trading via a practice demo account is simple, has no strict requirements, and is designed to get traders excited about opening a real account. However, the moment you start preparing to fund your account, you realize that there are a few more steps to cover.
Several brokers are very strict when it comes to funding your account. All brokers are strict when it comes to making withdrawals. As such, before you start using a real forex account, brokers will ask you to add and verify your identity and physical address.
This is mainly done for the security of your funds to ensure that when the time comes for the broker to process your withdrawals, they are sent to the actual account holder and not some masquerading to be you.
This is one of the most perspective-changing factors that traders experience after transitioning from a forex demo account to a real account. Psychologically, there is no pressure when trading using a demo account. This changes once you begin using a real account.
The main reason behind this paradigm shift in emotions is that with a real account, there is the risk of losing everything. So, it is easy to get scared and close positions early when the market is going against you. There is a flip side to this too. If the market is going your way, there is the risk of getting greedy and waiting before you close your open positions until things begin to go against you.
Then what follows shortly is panic, and before you know it, you have ditched the strategies that you practiced for weeks or months in a demo account. This is usually the beginning of the end, but it can also be turned around by taking a short break to calm down and refocus.
In summary, a practice account can be an important starting point for a new trader. It is a risk-free account, which means that traders can practice different strategies without worrying about how much they could lose. This is where expert traders recommend that you make all the mistakes you can so that when you transition to a real account, there is barely any to make.
However, as we have discussed, there are some key differences between a real account and a forex demo account that could hamper your successful transition to real money trading. It is good to take note of them so that your are not surprised when slippage occurs or when your order is not filled in time.