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What is a demo account? A demo account allows you to place trades based on real data without risking any money. It is opened with a brokerage firm for which no fee is charged by them including all the analysis tools and market data. You can sign up for a demo account on the internet too. They are funded with virtual money and the investor can start trading immediately.
Are Demo accounts really a good option?
Demo or practice accounts have many advantages over a real account, which has made it a preferable option for those starting to trade in the Forex market. Some of the merits include:
Less risk involved: Since you are trading with virtual money, the risk of loss becomes minimum or sometimes zero.
Polishing your technical analysis skills: Forex Demo Accounts are extremely useful for practicing technical and fundamental analysis with results. You can examine and study forex charts, trends, support lines etc.
Psychological effect of missing out on a lucrative deal: It is human psychology that we repent over missing out on a profitable deal. There is no use crying over spilt milk. A demo account takes away this fear.
Pressure in Real Live Accounts: Since real money is involved in real accounts there is a lot of mental stress and pressure associated with every trading position that you open. On the other hand, with a demo account you can try experimenting with different strategies and review your trading plan thoroughly, all with the ease and comfort of you not risking any real money.
Practice makes perfect: Since demo forex trading accounts do not charge you commission, you can trade as often as you want. This will help boost your confidence and familiarity with the various Forex tools and packages.
No fee charges: A broker does not charge a fee for opening up a demo account, unlike a real account.
Why Demo accounts are a bad option
Demo or practice accounts can sometimes be a bad option too. Consider the following disadvantages of using a demo account:
Over confidence: The investor becomes too overconfident dealing with virtual money since he carries no risk of losing it. When he finally moves on to a real account he will maintain and display this same overconfidence in his real trade dealings.
No real motivation: Since the demo account is not real, there is no element of basic business practices. All businesses are started with the purpose of making profit, not as a game or a learning platform. Demo accounts carry no real motivation for the investor to earn money since the money earned is virtual.
Conclusion: Keeping in mind all of the above differences between demo accounts and real accounts, it is now up to the forex trader on which one he chooses. In my opinion, a new investor can begin by learning to understand the system and pressures of Forex trading first on a Demo account. Once he has become fully equipped with the knowledge and expertise required to trade a real account, he may proceed to the real account.