Forex trading demo accounts are a fantastic way to learn how the currency markets work. With a quick registration and just a few clicks, you can get your hands on a six figure trading account, which you can use to try trading much larger positions than you’re probably able to with real capital.
But did you know that loads of people use demo accounts entirely wrong?
Forex trading demo accounts
Here’s the common trap which a huge amount of people fall into.
They open an mt4 demo account with a broker, and learn the basics of trading, like placing and exiting trades.
Perhaps they even learn a few extra functions, like pending orders.
Their account balance is a bit of a rollercoaster, going up and down. They often make a bit of money in a short space of time. Perhaps 5-10% in a few days or weeks. However, this is generally down to luck and placing trades which risk too much money. Remember, you should never risk more than 2% of your capital per trade.
Based on this experience, they then get the idea to do the same thing – but with real money.
The problem?
There is no strategy. Just blind luck in combination with taking on too much risk.
This is not a strategy. This is throwing you know what at the wall in the hope that it sticks.
They then open an account with real money, perhaps four or even five figures, and then blow it in a matter of weeks.
What went wrong?
It’s simple.
They opened a demo account and learned how to trade.
But they did not learn how to trade PROFITABLY.
And they did not learn how to trade RESPONSIBLY.
They moved over to trading with real money before they learned this, and ended it up paying for it with real money as a result.
This makes NO sense. Why would you risk blowing thousands of dollars in order to develop a profitable strategy, when you can develop one for FREE using a demo account, without risking a single cent?
That is literally the point of demo accounts. The problem is, people often get impatient, and move over to trading with real money before they have proved that they can trade profitably and sensibly.
Imagine if you started trading with $10,000 of your own money. With a responsible and profitable strategy in place, it’s possible that you could make several hundred dollars a month.
Now imagine if you hit some big losses while developing your strategy. Suppose you did perfect it, but in the process, you blew 70% of your money.
Instead of starting with $10,000 and a proven strategy, you’d be starting with just $3,000.
How annoyed would you be, knowing that if you’d been a bit more patient, you would have come to the forex market not only with a successful strategy, but more than three times the starting capital?
How to view forex test accounts
A great way to think of demo accounts and real accounts is like flight simulators and real airplanes.
Pilots don’t learn the basics of flying in a simulator, and wait until they’re sitting in a real airplane with hundreds of people’s lives behind them before attempting the maneuvers and procedures which they need in order fly safely and successfully.
Instead, they experience those maneuvers and procedures again and again and again in the simulator, so that when the time comes to do them for real, they will get them right when it really counts.
Basically, the airline tries to eliminate as many avoidable risks to its passengers as possible.
By sticking with a demo account until you’re profitable, you can protect your capital the same way. If you’ve got a chance to avoid unnecessary risk, it makes sense to take it.