Ever since brokers started offering their services online, they have been investing a great deal of money and resources in marketing their products. Part of such strategy is the offer of a demo account where novice traders can experience first-hand trading under real market conditions: however, their conditions can sometimes be deceiving.
Demo Accounts in Forex Trading
A demo account is a simulation of a trading account, often with a large sum of virtual money, that traders can try out to test the trading platform and see if they feel comfortable trading under the broker’s conditions before investing any amount of real money in it.
Such accounts can be highly sophisticated, reflecting the real-time market movements to the single tick, and allowing traders to test exactly the conditions they would be trading with if they were to invest any real amount of money with the company.
In the case of forex, it is also not uncommon to see demo accounts using historical rates during week-ends, when the currency trading markets are closed, and a full suite of technical analysis tools such as Fibonacci lines and arcs as well as advanced indicators such as RSI and parabolic SAR.
Why Demo Accounts Don’t Reflect Actual Trading Conditions
As realistic as they can seem, no demo trading account can reflect the actual trading conditions traders have to face when they are risking their own money.
In fact, emotion and psychology tends to play a preponderant role in any real market situation, making it difficult for traders to take objective decisions as to when to open or close a trade to maximize profit and minimize loss. Many expert traders know this and forge their strategy to specifically earn from newbies’ mistakes.
But there is also another major reason why demo accounts are rarely realistic: the typical demo account has a very high initial deposit, usually around $100,000, which minimizes the risk of a serious drawdown and margin calls, giving novice traders the impression that they needn’t worry about these very important factors, especially when starting out on a low capital like most novice traders do.
What to Do to Recreate Actual Trading Conditions
Experienced forex traders know how to overtake these obstacles and test a trading platform through their demo account effectively and reducing the bias as much as possible.
A common technique consists in setting stop and limit orders that simulate margin calls even for well-funded demo accounts. While this doesn’t quite solve the problem of emotion and trading psychology, it can still be of great help to assess the trading conditions of a broker with increase objectivity.
More in general, the best way to simulate actual trading conditions would be to set stop and limit orders the exact moment a trade is opened, without changing their levels during the course of the trade. Imposing not changing the levels as a part of your live trading strategy as well is an excellent way to make sure demo trades will adequately reflect the actual, live trades.
