A demo account is a practice trading account funded with fake money. It operates almost identically to a real trading account; it shows live rates, and the software used to on demo accounts is the same exact software real traders use. The most significant difference is that real trading involves real money, while demo accounts have fake money in them; if you lose on a trade in a demo account, you will not actually lose any money.
A demo account is a good idea for anyone remotely interested in trading, as well as for those who are experienced traders. Novices can use it as a tool to help them learn trader; experienced traders can use demo accounts to test out strategies with fake money before putting their own live money behind it.
Most brokers allow demo accounts to be created at any time, though some take demo registration down during weekends or during system maintenance hours. Disabling demo registrations substantially hurts the business of most brokers, and thus their incentive is to minimize downtime as much as possible.
While you can register for a demo account at any time, trading the demo account is typically limited to the market hours each instrument is available for trading. In this regard, the demo environment is identical to the live environment.
Brokers have differing approaches regarding to how long demo accounts last. Some brokers have demo accounts that only last for 30 days, while others have demo accounts that expire only after 30 days of inactivity. In any event, if your demo account expires, you can always register for a new one. Most brokers welcome customers to stay engaged with demo trading, as they see it as a way to earn the trust of the customer and help build their confidence in trading and their trust in the broker.
Why Setup a Demo Account?
Setting up a demo trading account offers traders numerous significant advantages:
1. Test out trading strategies. This may be the most important advantage that demo accounts offer, and the reason why many experienced traders trading live accounts continue to demo trade.
2. Familiarize yourself with the trading platform. Does your approach to trading benefit from you being able to access your trading account from multiple devices (phone, laptop, tablet)? Are you familiar with how the trading software itself works? Most importantly, do you actually like the platform and find it easy enough to use? Using a demo account is a great way to address these logistical issues. These types of logistical mistakes can result in unfortunate and sometimes significant losses for traders; as a result, the more you can familiarize yourself with the trading tools beforehand, the better prepared you’ll be to trade smoothly when you go live.
3. Test out the broker’s customer service. A demo account is also an option to test out the broker’s customer service. Does the broker have a chat or contact button available through their platform? If you experience any technical difficulties in using the platform, is the broker responsive and useful? Or, are they only interested in speaking with you to ensure that you open an account, and are using aggressive tactics that make you uncomfortable? Your time on a demo account is a good opportunity to determine if you trust the broker enough to send them your money and trade on their platform.
4. Test out the broker’s additional trading features. In addition to offering a platform and acting as a custodian of your money, most brokers also offer various tools to assist traders. Typically, this includes a news service, charts, education, and possibly a signal or money management service of some type. While you may decide that a more specialized service is best suited for these needs, you may also be interested in what your broker offers. Many brokers are investing more into these add-ons to differentiate themselves and earn greater loyalty from their clients, and thus seeing what your broker offers and how they integrate it into their demo account is another aspect you can consider when evaluating your demo account.
Your Demo Account Can’t Give You The Real Psychology
For the reasons noted here and more, a demo account is a very useful tool for traders. However, there is one vital element of trading that a demo account cannot offer: the psychological experience of having real money on the line. As experienced traders can confirm, until you have experienced the sting of losing money, your trading experience is a bit limited; how you will respond to a loss is an unknown factor. So, primarily because of this reason, success on a demo does not always translate to success on a live account.
If you are a new trader who has achieved some success with demo trading and feel confident in going live, it is often recommended to start with a small balance and build it up from there. “Size is earned,” is a common refrain amongst experienced traders with large accounts.
Note on Execution
In a live environment, what price you get filled at depends on various factors occurring both in your broker’s operations as well as those in the market at large. As such, there can be a discrepancy in the rates at which your trades get filled (your trade execution) and the price you were offered. Slippage is a term often used to denote when a trader receives a price that is worse than the price they were offered on their screen. In demo environments, there is slippage.