The Internet is filled with the promotions of demo accounts. The trading in stocks and various asset classes keep attracting the mainstream because of the convenience provided by online trading platforms offered by the brokers. Moreover, the rising number of investors results in the introduction of new technologies regarding investing and trading. And these new technologies come with greater convenience.
Demo accounts have been attracting global attention in the 21st century. But the idea of a demo account is born out of old-fashioned paper trading. Paper trading involved the written imaginary entries and exits, so these imaginary numbers were used to understand the methodology behind the markets.
An average person who is not a professional investor can also explore and learn about the investing and trading world. One can quickly learn and demonstrate the skills and techniques required for trading by using a demo account. In simple words, demo accounts are practice accounts where the users can leave out their emotions, greed and fear because the real money is not involved.
Novice traders and even professional investors can use the demo trading account to practice different trading strategies to sharpen their skills. In addition, traders can uplevel their trading game up to higher limits through demo accounts by minimising the risks and maximising the profits.
What is a Demo Account?
A demo account is an account on which a user can practice trading without putting in real money. There are various factors, whether emotional or financial, that affect traders while trading through online platforms. Demo accounts offer independence to traders from those factors. A demo account is funded with fake money.
Demo accounts are provided by various online trading platforms, including stock trading platforms, cryptocurrencies trading providers, currency exchange platforms (provides forex demo account) and much more.
Brokers offer their clients a demo trading account to experiment with the trading platform by trading in various asset classes, including stocks, cryptocurrencies, commodities and more. Before setting up a real or live account, one can thoroughly understand the trading platform and its various features. For example, reputed online forex broker PrimeFin offers a free demo account to potential clients and ranks as the best online forex broker.
Purpose of Demo Trading
- Demo trading serves different purposes which are associated with both risks and returns. One can take a high risk while using the demo account. On the other hand, S/he can use huge capital also as there is no limit due to the absence of real money.
- Demo trading accounts are best for those who don’t have enough money to put in real trades or are not interested in taking risks with their capital. Apart from novices, experienced traders can also get so much out of demo accounts as they can experiment with new strategies to apply in real trades for high returns.
- In addition, experienced traders often use demo trading accounts to chip off the potential error that can feed the high risk of losing money when trading CFDs or other instruments. As a result, they understand the potential risks by which they can lose money when trading, and then they do not repeat those mistakes in real trading.
- The free demo trading account provided by PrimeFin is best for both novices and experienced traders. From a virtual money standpoint, PrimeFin is one of the best brokers.
- You can get the most out of your trading experience through a demo account that can benefit you after switching to the live account. You can become a successful trader after getting this much experience out of your practice. You need a trading plan to gain profit from your investment. The aim here is how well you can execute your trading plan when it comes to trading with a live account.
- You can practice and sharpen yourself by executing the required trading plan with the help of a demo account. Your systematic approach will decide the amount of return you will get from your investments. That should be very calculative, and it should not just be about making money as much as possible.
- Due to the demo account, clients of the corresponding broker can practice trading strategies risk-free. Because of the involvement of risks by which retail investor accounts lose money, investors often sign up for demo accounts to understand the underlying risks to mitigate those risks or the consequences from the respective risks.
- If you are an experienced trader in a particular financial instrument, you may also want to gear up knowledge of other asset classes. A demo account can be an excellent option for you. It will serve your purpose of understanding different markets without putting in actual money, and you can monitor and compare the tangible aspects with your actions.
Difference between Demo and Live Trading
While trading with a demo account, it is important to consider no difference between demo and live trading. Try to view a demo account as a live account to apply the principles that you have learnt through demo trading in the actual scenario.
For your brief knowledge, here are the critical differences between demo and live trading.
As we now know that there are minimal restrictions while you trade with a demo account. The demo account offers you excess capital, i.e. fake. You can access your demo account for an unlimited time period. There is no risk of losing money. You can open a demo account with forex broker PrimeFin for free. PrimeFin is authorised and regulated by Labuan Financial Services Authority (LFSA).
When you place a bid, your order is filled if you can see the tick or move by one cent in demo trades, but this is not the case in actual trading. If the price of trades through the bid is at least more than one cent, then you can assume your order is filled.
Typically, a demo account or simulator allows traders to choose the amount of capital they want. Generally, they provide more capital to traders. And because of more capital, traders have the common tendency to buy a considerable number of stocks. But in a live account, you can only use the capital as per your financial capability. Plus, there are certain limitations on your position because of the high volatility.
Slippage is the situation when a trader executes the trade on a price different from the price s/he expected. Slippage occurs due to high volatility. So if you are trading in high volume stocks through a demo trading account, assume slippage by at least one cent. On the other hand, in low volume stocks, you can assume larger slippage because the chances of volatility are very high.
Because of the involvement of real money in live trading, you can be driven more by your emotions. But in a demo account, this is not necessarily the case. Greed, fear and unrealistic hope all these emotions can shadow your real trading journey. But in simulated trading, one can keep these negative emotions aside and better execute their trades with proper strategy or a trading plan.
Strategies for trading with Demo Accounts
Make it Realistic
The number one strategy is to keep your trading with a demo account as real as you can. Pretend that the capital you are investing is real. Try to abstain from the obsession of placing unrealistic trades. You have to remember slippage while trading with a demo account because slippage is the key factor differentiating between demo trading and live trading.
Define your Capital
Your broker can probably offer excessive capital, but it depends on you how you are using it. Keep your capital the same as much as you are going to use in live trading. You can make your demo experience more real through this strategy. If you are planning to invest capital more than the offered by the demo account, you can only use a fraction of the demo account capital.
When you have more capital, you may tend to buy a large number of shares of a fast-moving stock, which may not be possible in real trading. In a demo account, you have no limit on what you can do with your position. In the real market, your position gets affected by the activities of other traders.
Sharpen your skills
When you are trading with a demo account, it is essential to monitor your emotions. How the market trends can affect your trades have a psychological impact on the trader in actual scenarios. But in simulation, you should practice including your emotions and other skills like monitoring the market and execution of the trading plan.
Strategically put your emotions as you do in real trading. But ensure that you are not driven by negative emotions like greed and unrealistic hope. Because greed and fear can wipe out your ability to understand trade signals, you can lose money rapidly due to leverage and other tools to generate higher returns. Therefore, traders, especially novices, should have proper knowledge about leverage before using it.
If you fail to do so, stick to something that you enjoy the most. Then, ensure that you are correctly following your trading plan.
Get prepared to use a live account
After all, the actual trading begins with the live account. When switching to a live account, ensure that you have better knowledge of market trends and fundamentals of technical analysis. You can think the other way also as you are practising with a demo account. You can simultaneously copy your trades on a live account also if you can see the positive results. You can only place trades that are well tried and tested through simulation on a demo account through this strategy.
Pros and Cons of Demo Account
- A demo account provides you with the opportunity to trade in a risk-free environment. You can learn to operate a trading platform using a demo account, then adapt and apply the skills and techniques in live trading. Typically, demo accounts offer a large amount of capital, giving traders enough freedom to get their hands on various assets strategically.
- Simulation trading offers you to learn how price action movements affect the market with appropriate trading signals. Plus, it will make you understand both benefits and risks associated with leverage.
- There is no involvement of slippage or interest. Traders do not have to adjust dividends like live trading.
- Your trades may never be rejected due to some lack of funds. In addition, you have the liberty to extend your position size.
- And most importantly, you can develop your trading strategies. Simulation is the best way to learn and execute your trading strategies so that you can reduce your risks and increase your returns to a higher degree.
- One of the most significant disadvantages of trading using a demo account is that traders often place unrealistic bets while handling their demo account as a playing field.
- As you don’t require real money to invest through a demo trading account, there is a tendency of taking this facility for granted. Sometimes, traders do not make a trading plan or any strategy before placing their trades. They don’t even think about the outcome of what they are doing. They just make decisions based on their impulses.
- While there is no negative outcome of committing this mistake when you trade with a demat account but in reality, there will be a higher potential of losing money rapidly due to this negligence.
Whatever you do with your demo account defines your future success. So the only final advice is to use your demo account as a live account. Keep it real as much as you can. Ensure that you get familiar with the trading platform. Before entering the real market, you must learn different strategies other than what you know through a demo account. This is because certain things like the position size that we discussed above are totally different in the actual scenario. So you cannot be completely dependent upon the demo account.
You can easily understand how the market works by using a demo account. Traders often get confused due to market trends affecting the volatility of the financial instruments. A demo account can be your friend at such times. Whether you are a beginner or professional, do not forget to try various strategies to apply in the market. Demo account to a trader is just what training ground is to a soldier.