Many retail traders (or most of the retail traders) come to the Forex market with the idea of making a quick profit. Moreover, they expect to turn a hundred dollars into a million in virtually overnight trading.
That’s not going to happen anytime soon. Such expectations just aren’t fit for the Forex market. In fact, the Forex market spends most of the time in consolidation patterns, with the price traveling only when significant economic data comes out.
Ideally, retail traders practice a bit on a demo trading account before anything. Brokerage houses from all over the world (Australia, Europe, Japan and the United States) encourage traders to practice on a demo account before using a real one.
However, most of the times there’s a catch. Brokers limit the access to a demo account, typically to a month or something similar.
In doing that, they encourage traders to start trading in a live environment. With a bit of persistence, retail traders can find plenty of brokers offering demo accounts with an unlimited period to use it.
Why to Use a Demo Account
Plenty of reasons justify the use of a demo account. How do you know your strategy works on the broker’s platform?
Let’s assume you have a trading strategy. One that works and continuously makes a profit.
Considering that almost all trading today is automated, the logical step would be to automate your strategy. More precisely, to build a robot, or an EA (Expert Advisor) to do the trading for you.
Next, you put it to work on a trading platform, but then want to switch brokers. You’ll be surprised to see that the strategy may not work on the new trading platform.
Details matter the most. For example, where the servers of the new broker are located. If they are located in a different time zone, the closing and opening of the daily candles and even the four-hour ones will differ.
As such, everything changes, as any indicator the strategy may consider is typically using the closing price of a candle.
This is just one example. Another one comes from the spread difference during critical economic events.
Some brokers increase the spread between the bid and ask prices, but that’s not because the broker intends to do so. It merely reflects poor liquidity conditions during volatile events.
Other brokers have super-tight spreads and low commissions, but when it comes to rolling a position over (keep a trade open until the next day), spreads go wild. Again, liquidity plays tricks, and a strategy that worked on one account may just not work on another.
Above all, trading in a demo account has the benefit of using a virtual environment to play with paper money. Keep in mind that the Forex market is not a video game, but a place where real people having real money come to make a profit by speculating on the future price of a currency.
These people aren’t retail traders. Retail traders represent only about five percent or so of the overall currency market. Instead, these are players with far higher risk appetite, having more significant resources than retail traders and research departments and access to all kind of information.
We talk about commercial and even central banks here, hedge funds, institutional investors, also Forex brokers that keep all or part of their clients’ orders in-house. These are the forces to fight, and you need to be well-prepared to take part in such a battle.
The more experience one brings to the trading game, the better. Using a demo account for a while has only benefits in front of various market adversities.
One negative of a demo account is that sometimes it offers unrealistic conditions. For example, brokers may set up a trading account automatically with ten thousand or more in the account, like paper money. However, the trader would like to deposit in a live account only a thousand or so.
Hence, the practice on the demo account will use different risk parameters than on a live one. It is enough to create a confusing situation.