A demonstration or demo account is a test trading account which is supplied by most good FX brokers which allows you to trial all the features of their trading platform. It will also give you dummy funds to trade in current real-time market conditions.You will often hear traders be scornful about demo accounts by saying trading 'paper' money is not the same as trading real money - its easy to be brave with imaginary money. Whilst this is true, the whole point of using a trading system is that is helps you control your emotions of fear, greed etc experienced during trading.
But the real benefit of a demo account is that it allows you to test and examine all the features on several trading platforms so that you can learn to use your chosen trading platform with confidence. There is nothing worse than trying to place a trade and not knowing what to press or click on your computer. And then you miss a perfectly good trade.
Practice, practice, practice.
The legendary pianist Arthur Rubenstein was once walking in the street towards New York's famous concert venue, Carnegie Hall. He was stopped by a fellow pedestrian and asked "Excuse me, how do I get to Carnegie Hall?" to which the pianist replied "Practice, practice, practice!".
Before opening a live account, you should use a demo account to practice using your trading platform. Try entering Market and Limit orders during slow and fast markets and see what price you get and find out as much as you can about how your account works:
- How do you know when my order is executed?
- How much are my trades winning or losing?
- Where is my account balance?
- Where can I see my order history?
- Where can I see Limit Oders that have not yet been executed?
- Are there any other order types that your trading platform has that would be helpful?
- How can I change or cancel a single order?
- How can I close all orders if there is an emergency?
- How do I set the default size for my trades?
You need to know as much as you can about your trading platform if you want to use its features to help your trading.
Errors can be Costly
Every trader makes "fat finger" errors where you press 'Buy' instead of 'Sell' or you Buy '100,000' instead of '10,000' etc. These simple but often costly errors (they are rarely in your favour) happen if you are unfamiliar with your trading platform so practicing placing orders, cancelling them, closing all orders, changing them etc will help you avoid these errors in the future. This means you should have no nasty surprises when you trade your own funds in a live account and you will be able to place your orders quickly, accurately and efficiently.
Don't assume
This practice in a demo account is important as I discovered something about my broker platform recently: when I place a Limit Order to Enter a trade what actually happens is that when the limit is reached, the order turns into a Market Order and I get the best available price NOT the limit price. I only get the limit price when the Limit Order is placed to Exit a trade. I had assumed that a Limit Order was the same for Entry and Exit trades. Not knowing this cost me 40 pips on one trade! So what I now do is Enter trades using a Market Order and Exit via a Target or Stop price using a Limit Order.
This practice in a demo account is important as I discovered something about my broker platform recently: when I place a Limit Order to Enter a trade what actually happens is that when the limit is reached, the order turns into a Market Order and I get the best available price NOT the limit price. I only get the limit price when the Limit Order is placed to Exit a trade. I had assumed that a Limit Order was the same for Entry and Exit trades. Not knowing this cost me 40 pips on one trade! So what I now do is Enter trades using a Market Order and Exit via a Target or Stop price using a Limit Order.
