The Dangers of Forex Demo Accounts

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By: Terry Allen

Expert consensus strongly recommends that you should paper-trade Forex before taking any financial risks by going live. Forex brokers will provide you with extensive free demo facilities to enable to perform this activity.

In doing so, you will gain the opportunity to evaluate the trading platforms of your selected brokers for free as well as the ability to validate the performance of your own Forex trading strategy. Forex brokers profit from this deal as well because they have the chance to promote all their products with the overall objective of encouraging new clients to open full live accounts with them.

However, you must understand that there are significant differences between operating a demo account to trading a live one. For instance, you will not be subjected to the same psychological and emotional pressures whilst trading the former because you will not be under any financial stress. In contrast, live trading can produce substantial additional problems that can readily cloud your rational judgment.

You will simply not have to contend with so many difficult and debilitating emotions when demo trading. For example, you will be able to contend much easier with the mounting fear that can arise should price dramatically move against your trading positions. In addition, you will hardly be concerned about losing your entire demo balance because you can easily replace it with another.

You could also develop seriously bad mindsets should, for example, you attempt to hold your trading positions open definitely. Such a practice would be extremely dangerous to transfer to your live environment as it could easily eliminate your entire financial budget.

You are always well-advised to rein in your emotions whilst live trading, but this is a difficult art to learn when in demo mode. You will constantly have to protect and safeguard your limited monetary fund whilst live which can have severe effects on the quality of your decision making. For example, you will become increasing stressed should you be forced to witness your financial budget shrink before your very eyes.

To counter these problems, you must make your demo environment stimulate live trading conditions as closely as possible. For instance, you will have a generous dummy balance in the region of $50,000 when you open a demo account. Such a figure can be very misleading though and you should alter it to match the amount that you intend to use when you go live.

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6 User comments
Holger
2010-04-13 07:04:42Z

I agree: to learn to deal with emotions while trading, paper trading is useless. With the availability of mini/micro lots it is better to open a small live account and to trade minimal position sizes.

ernest nnebe chinedu
2010-04-12 05:49:54Z

i was told the same thing about demo a/cs and i appreciate the extra tip.But you did mention paper trading how can i go about that, i am still on the learning stages so i trying to gather all that i can before going live.

Alvin
2010-04-11 23:42:09Z

Demo account is only for practicing the skill of applying the strategy, familiarize the platform features. It probably use for 1 month or maximum of 2 month. The longer you trade with demo account the more dangerous you are as the bad habits from demo account will carry to live account. Hopefully in live trading, those bad habits can be rectify and make the changes before too late.

bt
2010-04-11 22:39:31Z

"desecrate" your budget? As in spitting on its floor and blasting that rap music? I suppose "decimate" was the intent, but even that's not quite right since losing a chunk of your account isn't the end of the world. How bout just "destroy"?

Hillel
2010-04-11 21:00:00Z

bt, thanks for that, corrected, just wanted to make sure you were paying attention. :) Alvin, I Agree, thanks.

Hillel
2010-04-11 21:00:00Z

Ernest, "Paper trading" is just another way of saying demo trading...


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