A demo account is basically a practice account, or trading simulator, that allows you to practice day trading with a wide range of financial instruments, from stocks, currency pairs and options to CFDs and cryptos.
Demo accounts use fake "virtual" money, allowing you to gain trading experience without risking real money. This allows you to develop trading strategies and gain confidence while familiarising yourself with the markets. It's also an effective way to test a potential broker and software.
What do practice accounts allow you to do?
The best demo accounts allow you to simulate real trading, with the only difference being that you'll be using fake risk-free money. This way you get a full experience of the markets and the trading platform without the pressure of risking your money.
- Explore - Testing different financial markets allows you to get an idea of how they behave while finding the ones that are best for you.
- Gain experience - Before risking real capital, you can practice opening and closing trades, as well as applying stops and limits. You can view margin requirements and track your profits and losses.
- Charts - Learn how to read and interpret charts, test technical indicators and identify trends.
- Past performance - You can analyse your past performances to correct mistakes and refine your strategy before you risk actual money.
- Trading tools - Learn how to read and use information from news feeds and market data.
- Watchlists - Demo accounts also allow you to identify and monitor markets that interest you.
The benefits of demo accounts
Training
- Risk - Because demo accounts use fake money, mistakes won't cost you a penny. In addition, they allow you to practice day trading while you're still saving for the initial deposit into your account.
- Price action - The best way to master price action is to experience it. Forex trading demo accounts, for example, allow you to practice reacting to volatile markets while capitalising on price movements.
- Broker and platform - Lastly, trading with demo accounts is an effective way to test a broker and its trading platform. For example: you can check that their software has all the charts and tools you need.
Strategy
- Calibration - Demo brokerage accounts are the perfect tool to fine-tune your strategy. You can make mistakes and adjustments until your plan is consistent, without losing any money. Indeed, overtrading, limiting your profits to small moves, and directional bias are all common mistakes that can be costly if you don't make them on a demo account first.
- Advanced testing - Once you have a market and a strategy in mind, you can either backtest it or test your trading plan. While backtesting can be useful, it lacks the emotional element. Advanced testing allows you to implement your trading system while fighting the pressures of real time trading.
- Drawdowns - No matter how effective your trading strategy is, there will be days when the market is against you. However, using a demo account allows you to practice sticking to your plan and to adjust your position sizes until the market situation improves.
Overall, the beneft of a demo account is that you can test a broker's platform and your strategy with 0 risk.
Demo accounts: a few drawbacks...
Gaps with an actual trading environment
- Trade execution - Demo accounts often show better execution than live trading. This is because demo accounts usually execute an order at the price displayed on the screen. However, in a real market, slippage occurs. Orders may not be executed at the posted price. This can make it difficult to achieve profit targets.
- Increased capital - Demo accounts typically allow you to choose the amount of capital you wish to trade with. As a result, many people opt for much more capital than they will have when trading live. Larger capital makes it easier to recoup small losses. You may also find yourself unable to afford the expensive instruments you have explored with a demo account.
- Spreads - Online forex brokers often try to impress potential traders with tight spreads in their demo accounts. However, in fast moving markets the spread that are displayed can be much wider.
- Leverage - Many traders like the increased leverage that some brokers offer in demo accounts. While this can result in substantial virtual profits, in live trading it can also result in significant losses.
- Trade rejections - In demo accounts, trades almost always go ahead as planned, regardless of external factors. In live trading, though, price changes between the submission of your trade and its execution can result in your order being rejected. So be prepared to receive new quotes when you switch to live trading.
- Trading tools - The free charts and packages that you get when trading with your demo account may come at an extra cost when trading live.
- Market movements - Your demo account server may not take into account interest and dividend adjustments, or price movements outside of business hours.
Psychological divergences
- Emotions - Demo accounts don't expose you to the fear, hope and greed you may feel when trading live. Fear of losing money can lead to costly mistakes, while greed can lead you to hold on to a winning position for too long. Unfortunately, you can't learn to control these emotions with a demo account.
- Complacency - Proper risk management is often cast aside and forgotten with demo accounts. Traders often take on more risk than they would if real funds were involved. This can lead to bad habits when you switch to a real trading account.
- Over-trading - The excitement of trading leads many demo-account traders to over-trade. After all, why not take the risk when it's not real money that's at stake? This can become a bad habit. However, when you shift to real trading, you will then have to learn that quantity doesn't always trump quality.
In conclusion, comparing a demo account with live trading highlights a number of potential pitfalls to consider.
This doesn't mean that you shouldn't use demo accounts. It just means that you should be aware of the above-mentioned risks, so that you're prepared for the differences when you start trading with real money.
Switching from a demo account to a live account with real money
When you strive to become a trader, the first thing you do is open a demo account. Of course, since you want to succeed and make real money, why stop at the demo stage?
But the following feelings are common: the fear of losing real money and the doubt that you could actually turn into a profitable trader. So allow us to guide you through your transition to a successful trader, with an easy to understand 4 step plan:
Demo account to real account: Our action plan
- Allocate some capital to trading
- Open a real money account
- Calculate your initial trade lot size
- Start trading!
You already know how to trade since you've done so on a demo account. We'll therefore develop each point in detail;
Allocate capital
You need to set aside some capital. The amount is up to you, but a reasonable minimum is £300-£600, as a lower amount limits the number of trades you can make.
Trading is a high-risk activity, so you should be prepared to lose some or all of that money. If the minimum deposit at a broker is less than what you have, you don't need to put it all in - just set it aside.
Open a real money account
You don't have to use the same broker that you demo traded with, but this transition will be the easiest one to make. Visit other brokers' websites if you want to try someone new for the real account.
Calculate a trade size
How much are you going to risk on each trade? 1% to 2% is a conservative number.
If you make 40-75 trades, you'll be in a good position to know if you have what it takes to become a profitable trader.
If you do less than that, you won't know if the results are due to luck. 75 trades is where you can truly separate winners from "unprofitable" traders.
Start trading!
Congratulations, you're a trader! But, are you a winner?
Opening a free demo account
Most demo accounts are easy to open. Most of the time, you just need to go to the broker's website and fill out a basic form.
You'll also typically be asked for:
- An email address
- A username
- An 8-character password
- Your address
- The currency of your account (pound, euro, dollar, yen are the common choices)
It's as simple as that. Your account login details will then be emailed to you and you'll receive instructions on the next steps.
| Brokers | Platforms | Expiration | Trading instruments | Broker review | Open a demo account |
|---|---|---|---|---|---|
| MetaTrader 4 and 5 | Unlimited | CFD account: commodities, cryptos, stocks, currencies, indices, ETFs, bonds | Admiral | ||
| MetaTrader 4 and 5, AvaOptions | 21 days | CFD account: commodities, cryptos, stocks, currencies, indices, ETFs, bonds, vanilla options | AvaTrade | ||
| MetaTrader 4 and 5 | Unlimited | CFD account: commodities, stocks, currencies, indices | XM | ||
| xStation 5 | 30 days | Stock account: stocks CFD account: commodities, cryptos, stocks, currencies, indices, ETFs, bonds | XTB | ||
CFD trading comes with a high risk of losing money, it is therefore not suitable for all investors. | |||||
MetaTrader demo accounts
The most popular trading platform is MetaTrader (MT4 or MT5). It's an industry standard available with most brokers.
Once you've downloaded MetaTrader, you'll be able to analyse the markets using a series of technical indicators, without risking any capital. This will allow you to practice analysing price action, charts, support and resistance lines, currency correlations, and more.
MetaTrader demo accounts can be opened on a desktop platform, as well as on mobile applications. Both will also allow you to test automated strategies using historical data to optimise your settings.
Once you have your MetaTrader account password, you can practice all of the above until your demo account expires. However, you will find many brokers offering demo accounts that don't expire if they remain active.
This means you'll benefit from live quotes from all markets, as well as a virtual portfolio, which allows you to practice in real market conditions for as long as you want.
You also benefit from diversity. So, you can choose between demo accounts for forex and gold trading, to name but a few.
In fact, since demo accounts usually have no time limit, you can try your luck in as many markets as you want, until you find the asset category that suits your trading style. Demo accounts are the perfect, risk-free way to identify your strengths and the areas of your trading plan that need attention.
One last thing about demo accounts
You don't have to risk real money right away. You'll find many free demo accounts for day trading, whether for cryptos, currency pairs or stocks.
Overall, demo accounts offer a host of benefits, whether it's refining a strategy or learning about markets you're not familiar with.
However, they have certain limits, whether it's dealing with various emotions or identifying a need for a more effective risk management strategy.
But whether or not you're convinced that using a demo account is useful, it's still an effective way to test out a potential broker and its platform.
Forex Tester - a professional forex trading simulator
Forex Tester trading simulation software offers a free version with limited features:
