Most forex brokers offer a free Demo currency trading account to new traders and those who are looking to try a new platform. They really are a nice benefit to traders. But nothing is perfect and in today's article I'll be pointing out some of the drawbacks along with the benefits.
Why brokers offer demo currency trading accounts
These trading accounts are similar in nature to play money in a Monopoly game, or the free trial you can get at an Internet casino. You get to wheel and deal with large (or small) sums, but with none of the risk that comes from opening your own wallet. The fun factor is there but win or lose, you never actually make gains or incur losses.
Meanwhile the providers of the demo accounts are hiring you will like using there system and go so far as to open a live account with them. This is how they earn their money, and so because the free account is generous, they do make enough money from real-money traders who take step two and go live. And they have an advantage if you use their platform first.
You may remember the 'browser wars' between Microsoft and Netscape? It got nasty, but today Microsoft's browser, Internet Explorer, now comes pre-installed in most PC's even though Netscape was considered superior by many users. Bill Gates and his team understand that because most humans dislike change, we
have a tendency to stick with the first one of anything that we try. Even if there is another better something available, if we see and use the 'lesser' product first, we typically stick with it. So keep this in mind as you try out your first demo account.
If you'll commit to comparing at least three, you are more likely to find the one that is intuitive for you. This is important because when you're ready to trade live, you do not want the intricacies and technicalities of a trading platform to distract you from the reason you are using it.
The beauty of the free account for you is you can try out one or more trading systems to find one that performs best for you, your goals and your temperament, with no risk. The benefit to the broker is that if you try their platform first, you are very likely to end up investing your funds with them rather than the other guy. That's why they will bend over backwards to help you get set-up and using their platform.
Ideally, practicing on a free account will allow you to work out a solid trading plan, and get over the first-timer jitters. Once you know what to expect you can then trade based on your plan, not on adrenaline.
Now for the disadvantage
There is a paradox here, in that the main disadvantage is the same as the benefit of the demo account: the lack of risk. When you have no money on the line, you may enter trades that you otherwise would not. If you profit on paper from trades you would not have entered had real money been on the line, then this is of no benefit to you.
As you read this you may be thinking that you would never do that because you understand the difference between play money and real money. My intent is not to insult your intelligence, but to make you aware of what can happen when you demo trade. Remember when you were a kid, how easy was it to spend your parents money? But when it came time to spend your allowance that you had earned yourself and saved-up, the purchase took on more meaning and importance, did not it? Demo trading gives you that free-ride feeling, and if you're not aware of it, it can be carried over to your live account with disastrous results.
So use your free accounts only to test your trading plans, with discipline and consistency and you will be ok. And if you make a big gain while trading on a practice account, wait until the thrill has passed before you invest. Just as you should not enter a trade based on emotion, never open a live account based on emotion, either.
Track your practice trades with a journal or spreadsheet, and never part with your money when you are in a highly emotional state from successful demo currency trading.
Source by Tracy Austin