i. A demo account is one that is solely for practice and no real money is involved in it.
ii. Demo accounts allow traders to get used to the trading environment.
iii. Don’t spend too much and don’t even spend too little time on demo.
Demo accounts are virtual or practice accounts provided by forex brokers. You can trade on these accounts without having any real money involved. It can help you practice your strategy or trading setups and get comfortable with the forex market and trading environment.
What is a demo account?
We know that the forex market is a decentralized over-the-counter marketplace for the exchange of foreign currencies.
The forex market is not situated at a central physical location but is rather traded over an Electronic Communications Network (ECNs) which is an interbank network.
If traders intend to trade the foreign currencies they need access to this forex trading network and for this, they will have to open an account with a forex broker and trade through them on the forex market.
A forex broker usually provides clients or traders with two types of accounts - a live trading account and a demo trading account.
A live trading account is one in which the capital is that what the trader deposits with the broker and that every order placed to buy or sell a currency pair will actually be placed on the forex market and will affect the PnL.
A demo account is a practice account that brokers provide to clients as a part of the overall service. In this account real capital of the client is not involved.
Demo accounts mimic the actual forex market and every order placed through a demo account to buy or sell currency pairs is not actually placed on the forex market.
Trading on a demo account is also known as paper trading or virtual trading.
Why trade on a demo account?
Now that you understand what demo accounts are I am sure that you will have a question as to why even spend time trading on a demo account. But, let me tell you one thing, time spent in practice is never a waste of time.
The forex market is not a beginner-friendly one, beginner or experienced, nothing matters other than how well prepared the trader is or how well researched their trading plan is and how spot on their risk management is.
Directly jumping on to the live account without any practice as such will somewhat teach the trader a thing or two but during that process, their capital will take a hit.
The main proposition of providing traders a demo account is to give them the luxury to test themselves and the forex market out.
Traders can always go through the demo account phase to get a feel of the market and the market dynamics.
Traders that are completely new to the world of currency trading can test their strategies in a risk-free environment.
A demo account also allows traders to dabble with the various types of orders that are available to them through their broker.
How much time should one spend on a demo account?
How much time of practice will it take for a football player to play in professional games, or how much practice is enough for a musician to perform in front of an audience? There is no definite answer to such questions.
I had come across a Ted talk once in which the speaker said that in order to become completely proficient at a thing, one needs to practice for at least 10,000 hours.
But the question that arises here is that does everyone have that many hours to dedicate to practicing?
What I want to infer from all this is that no one other than the trader himself can give an answer to this question.
Let us consider two traders A and B. Trader A is intending to trade forex full time and does not have any other work commitments while trader B has a job and wants to trade forex part-time.
Both open accounts with brokers and trade on the demo account for a while before going live.
Trader A has lots of time in the day to dedicate to learning and practicing on the demo account as compared to trader B that has a limited time for this purpose, hence it might be long before he is ready to trade in a live account.
To sum it up, whether one is ready to move on to live trading from demo trading is completely subjective.
The trader will try out the various setups and strategies and will test out the brokers' trading platform in order to become accustomed to it.
Once the trader sees an improvement in their demo trading, they can always begin trading on the live account.
In case the trader is of the opinion that they can still improve in some aspects of trading, they can spend a bit more time on the demo account before trading live.
But, it’s not done yet. Spending too much time or even too little time on demo accounts will come with its own fair share of pros and cons.
If you spend little time on a demo account then you will get to trade live faster and if you stay on a demo account for longer then you practice more. These were the pros, but what about the cons?
If you spend very little time practicing on a demo account then you will not experience the various phases the market moves in. You will only get exposure to what the market did in that short period.
If you jump on to live trading after a brief period of demo trading, then there are high chances that you will become clueless when you see different market phases.
You will not know what to do in such conditions as you did not prepare or practice for it and you do not have any plan laid out for it.
On the other hand, if you demo trade for a longer time, then this too will have some problems.
Like any other trader, I too was a beginner at some point in my trading journey. I used to spend a lot of time demo trading and what it lead to was that I started getting very comfortable with the risk-free environment and I also started developing some bad habits.
I never used stop-losses because I knew for a fact that my actual capital was not being risked and this thing hurt be bad when I shifted to live trading.
Unlearning such negative habits that hurt you in your trading is difficult and trust me if you manage to not pick up such habits in the first place, you will have a relatively smoother trading journey.
Now, demo trading for too long and not for too long both have its downsides, what to do then? In order to deal with this, I would suggest that you set some goals and try to achieve it twice or thrice before you jump to live trading.
Whenever I come across any strategy or a setup, I set a goal of making 20-30% of my capital from that particular strategy. I will demo trade the strategy till I accomplish the goal at least twice and then only will I deploy the strategy in live trading.
By doing so, you are actually emulating live market conditions in your practice and you are better equipped to deal with situations you will face in live trading.
At the end of the day, it is your call to make, you have to decide for yourself what works and what does not work for you. But whatever decision you take, make sure that you take an informed decision.
Have you practiced on demo accounts?
See, there can be no definite answer to how long should one practice on the demo account before trading live. It is a decision one has to take on their own after carefully evaluating the time they have spent learning and mastering the skill.
You should know that there are lots of differences between trading live and on a demo account. Hence, you should spend enough time learning the skill of forex trading.
But not more than what will make you so comfortable with the risk-free, emotionless environment of demo trading that you are unable to cope with the actual forex trading environment.
So, have you had any experience with demo accounts, or have you spent time practicing on demo accounts?
Share this blog post with others and let them also get the answer to the question of how long should one practice this skill of trading.
Feel free to reach out for any questions or queries through the comments section and I will get back for sure.