Everyone has heard about forex demo accounts and roughly 98 out of 100 traders recommend forex demo accounts to new traders. They are very popular, especially among retail traders and there is a growing number of forex brokers who push demo accounts in their marketing efforts and allow traders to manage up to $100,000 in virtual funds. You can go to every online forex forum and you will find dozens of posts which encourage new traders to start out trading in demo accounts.
Some even insist that before a new trader opens and funds a live account that they absolutely need to practice trading in a demo account. This development, often sponsored by forex brokers, is one of the main reasons so many new traders fail in forex markets. Demo accounts are not only useless; they are dangerous and can be the vital variable which may determine success and failure of new forex traders.
Let’s take a look at the biggest myths of forex demo accounts
- New forex traders may use forex demo accounts in order to practice currency trading which will allow them to gain necessary experience.
The above statement is a myth and absolutely wrong.
First of all, you are not trading in a demo account. There is no real money, no profits and no losses. It is a worthless waste of time. Secondly, you will not gain any experience in a demo account. It is a fake environment and you will never learn the two vital aspects of successful forex trading in a demo account.
What are the two vital aspects every successful and profitable forex trader needs to master?
- Trading psychology is number one. No matter how much you think you are mastering this, you will never do so in a demo account. Once you have made a real deposit, the trade changes because the psychology is different. The only way to master the psychology of trading is to trade real money in a live account.
- Risk management is number two. In a demo account you simply do not care about the funds as it does not matter if you place a few bad trades and lose your virtual money. You will never adapt true risk management metrics which are vital in order to protect your account to the downside.
- You can test your forex strategy in a demo account.
This is another myth. You cannot test a real-world application in a demo environment. A forex strategy is only as good as your execution of it will be. You will never be able to test your strategy with success in a demo account. The only way to test if you and your strategy do work together and are able to generate consistent weekly profits is to test it in a live account.
How do you test it in a live account without generating huge losses?
You do so in micro-accounts with a small deposit while you only trade 0.01 lots. A $100 deposit with this approach will allow you to test yourself with your strategy in a live account for several months which is the only way to test a strategy while you also gain valuable trading experience.
- Once you are able to generate consistent profits in your demo account you should go live and do the same.
This is another myth. There are plenty of forex traders who are able to perform rather well in demo accounts and as soon as they open a live account and fund it they will blow their account in no time and eventually give up on forex trading.
Why are so many forex traders good in demo accounts and fail pathetically in live accounts?
The main reason is that they are being given a false sense of security. They actually do believe they have learned how to trade in a demo account and equipped with that knowledge they open a live account and fail as the opening and funding of their first live account is where their true forex education begins.
'You can teach an individual that two plus two equals five and they can master that knowledge, but once they are released into the real world with wrong knowledge they will fail as expected. The system works quite well.'
Now let’s take a look at a few dangers of forex demo accounts
Forex demo accounts will waste your most precious commodity; time. You can always replenish an account with funds, but you will never be able to make up for lost time.
New traders will get a false sense of knowledge in forex demo accounts which will haunt them in live accounts. Those traders feel as if they are equipped with the necessary requirements in order to succeed in forex trading and therefore are set-up for failure.
Many new forex traders will adopt bad trading habits which will cause them to lose their live account once they decide to open and fund an account. They simply do not care about their account and will not learn basic trading practices such as:
- Execution of forex strategies especially when the trades move against them
- Trading psychology as control of emotions especially as their account balance shows a floating trading loss
- Proper risk management procedures
Never underestimate the dangers of a fake environment as habits are developed fast, but shaken off slowly. As mentioned in the opening paragraph, roughly 98 out of 100 traders recommend forex demo accounts. Having said that, roughly 98 out of 100 traders fail at forex trading.