Using a demo account allows first time traders to experience and trade with an account that looks and acts similarly to the real online trading accounts traders use. Demo account users receive an amount of virtual money in the beginning, and can start trading by opening selling and buying positions. Just like a real account, the demo account shows market movements on the traders’ screens, so they can decide if they should continue their trade or get out.
As a common way of encouraging forex traders to use their deal execution services and deposit funds with them to use as trading account margin, most online forex brokers will offer a free forex practice account to potential or existing clients. Generally known as a forex demo account, such accounts allow a trader to experience a hands-on demonstration of what it feels like to trade currency pairs in the forex market with that broker without putting any real money at risk.
Forex practice accounts deal in virtual money, which doesn’t invoke any emotional responses in a trader. Profits and losses carry no sentimental value, and a trader doesn’t care whether they win or lose money through a demo trading account. Therefore, a demo account is incapable of replicating the real-life emotions of a live trading account. A trader may be successful in a demo trading environment, but they might find it difficult to duplicate the same or even a fraction of the performance under live trading conditions. Hence, there can be significant differences in trading results between a demo and a real trading account.
One of the major cons of the demo forex account is that it deals in virtual money which has no tangible value outside the real world. You certainly wouldn't care if you ever lost your monopoly cash, and no matter how real time the demo account appear to be, it doesn't really involve the risk of losing real money and that makes the new traders more careless. Unless there is no real money involved, most new traders will never get how volatile a market forex is and one can lose money quickly than they expect.
A forex demo account can be undeniably useful in honing a trader’s technical skills, but ironical as it may seem, unless the trader experiences the difficulty of making trading decisions involving real money and experiencing the pain of losing a sizeable portion of it in live trade, he won’t be able to fully understand, much less avoid, the real underlying risks of forex trading in his future trades. Artificial time or funding limits placed on demo trading accounts by your broker can significantly affect the results you can obtain when demo trading.