The advantages and disadvantages of a demo account

Many amateur traders these days are advised by brokers and pros to prepare themselves and practice their skill on a demo account before getting into the mainstream trade. A demo Forex account is a sort of an indirect 'virtual training program' where you get to practice your trading skills, in a completely risk free atmosphere, only to get you familiar with the factors that a successful trading demands and to help you develop some basic strategies.

Traders over the time have had much divided opinions about its applications. Some consider it a good start, while others think of it as a waste of time. So in order to help you choose whether or not you should get involved in the trading process of a demo account, below are some major pros and cons of this virtual trade:

Major Weighty Advantages of a Demo Account:

1. Easy Access

Opening a demo account is one of the best and easiest ways to get an access to the trading world and learn how the market works, along with learning the methods by which various currencies are traded across the globe. The best part of this opportunity is that no money is required to open a demo account, which means that you get a good chance to learn, without spending a single penny of your own. Your name, address and a valid phone number is all that you need to give the demo account a go.

2. Trading Strategy

Most of the trading situations on the demo accounts are close to the reality, hence they are ideal for practicing your forex trading strategy, and all this comes without the financial risk. This will allow you to learn in a comfortable, fearless environment and sharpen your skill. Even those of you with already enough experience, can give it a try in order to practice any new strategies that you wish to implement, before actually putting it to use.

3. Familiarization with Trading Tools

A demo account allows you to get accustomed with the trading platform, which is comprised of Forex trading tools, technical resources and other trading facilities, along with a Forex news feed. This familiarity will help you form a sound basis for your future in trading, as in the case of live trading all these tools need to be easily accessible. Hence, a demo account helps you to prepare for the mainstream trade.

4. Understanding the Dynamics

Training in a demo environment also helps you to understand the implications of trade size and also adapt more comfortably to the constant fluctuations of the market. The forex trade market is one of the most challenging markets to trade in and hence requires a close eye on the constantly varying trading dynamics.

The Disadvantages

Looking at the other side of the coin, the top major disadvantages of a demo trading account include the following:

1. Fake Money

One of the major cons of the demo forex account is that it does not deal in real money, leading to a lack of understanding and the value of capital in the outside world. Due to the absence of real money the buzz of the market dies down and at the end a person is unable to learn the severity of the financial risk involved in trading. And so it is unpredictable how you'll act if your actual hard earned money is at stake.

2. False Confidence

Demo trading has also been known to make the amateurs feel that they have entered the easiest and laid back trading activity in the world. This is because the trading environment lacks the involvement of genuine factors like real money and actual market fluctuations. And hence, usually an amateur creates a false ease in his mind that may lead him to a loss once actual capital is involved.

3. Realizing the Risk Factor

Losing at a demo trade is like losing at monopoly, no matter how much money you lose, you will never understand the value and the extent of loss, because the money involved is not real and hence one may not be able to develop a healthy fear of loss. Demo trade can never induce the actual trading discipline required by a trader, which is only gained when a person realizes the risk and loss factors. Real FX Trading teaches us to avoid expectation and hope based trade but so, is not the case in a demo trade.

It is only wise to understand the pros and cons of a trade before stepping into it and fully analyzing the risk factor involved because only then can a trader choose his line of action, in a way that is not regrettable. It is only wise to keep in mind that the market is a very risky one and comes with no promises. So understanding the dynamics fully before stepping into the trade is the most intelligent choice.

Articles based on: 
Forex