Forex Demo or Real Account?

Forex Trading: Demo Account or Real Account?

In forex there are two types of accounts: the demo account and the real account.

A forex demo account is a virtual account, used by traders to carry out trade simulations, and generally to practice forex trading. The essence of providing a forex demo account to traders is for them to do a whole lot of things that will enhance their trading experience and improve their ability to trade profitably in the forex market.

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A real account is where traders can actually trade under real market conditions, with real money.

A few years ago, demo accounts were the only option that traders had when it came to practicing forex trading. But there are now opportunities to practice real money forex trading, either with no-deposit real money accounts, or even micro accounts that are provided by forex brokers.

So the question for today is: which account should traders use when they are still learning the ropes of forex trading? Should they use demo accounts or should they use real accounts? To properly answer this question, we need to look at some trading perspectives as concerns the use of demo accounts and real money forex accounts.

Demo Accounts

What purposes does a forex demo account serve to traders?

a)    Helps Traders Understand the Trading Platform

Forex is not just about trading strategies, software and trading systems. Every product has a user manual which guides users on how to make use of the product. In forex, such usage must be made practical. A trader must be able to understand how the trading platform works.

There are a lot of things that a platform does apart from being the gateway to forex trade executions. Platforms contain charts, and traders need to understand how to use the charts. They also need to know how to switch from one time frame to another time frame with one click. Traders need to understand how to set the various types of forex orders on the platform. Traders need to know how to deploy indicators and other tools of technical analysis. There is a lot that needs to be understood about platforms. A real money account is not where such stuff should be learnt. That would be like sending a trainee pilot to a U2 stealth bomber without any type of flight simulator training.

Many bad trades are a result of improper use of the forex platforms. Not every broker uses the MT4, and so a trader must be able to understand how a proprietary platform works. So if you want to test how a platform works, the demo account is where you should do that.

b)    Testing EAs and Indicators

A demo account is usually equipped with facilities for coding EAs and indicators, and testing same. So if you are a fan of automated trading, then the demo account should be used for designing and also performing initial testing of your EAs and custom indicators.

c)     Strategy and Trade Simulations

A demo account is where your strategies and systems should be formulated and subjected to initial testing. Usually if a system does not hold up on demo testing, it is not suitable for use on a real account.

So if we can do all these with a demo account, is there a place for the use of a low capital real account in forex? The answer is an absolute yes. The demo account is limited and cannot test all that needs to be tested prior to commencement of a real money trading career. Just as a pilot will need to actually get into a plane on training missions after flight simulation training, so a trader will need to actually get into a real trading atmosphere to see if all that has been learnt on demo will hold up, and more.

Real Account

What is a real account to be used for as far as the learning process is concerned?

a)    Psychological Trading

Emotions will never come to play on a demo account the way they do on a live trading account. The only way a trader will ever learn to control the various emotions at play is to use a real money account. A micro account which allows the trader to deposit about $200 is just the place to do this.

b)    Correction of Mistakes

It has happened to all of us. The first attempts to make money on a real money account are not always successful. The mistake that many traders make is going back to their demo accounts to correct core trading mistakes. This is wrong as there is no way such mistakes will ever get corrected on demo. I give an example. How do you correct mistakes attributable to poor risk management on a demo account? The real money micro account is where such mistakes should be corrected.

c)     Live Testing and Optimization of EAs

If you want to really test whether your EA is capable of making money on a real money account, use it on a real money account. You cannot know how good a meal tastes until you actually eat that meal.

Conclusion

To conclude this lesson, we put the question across: a demo account or a real account? The answer is that a trader will actually need both, but then a line will have to be drawn to demarcate when each account type should be used.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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