It is essential to understand the difference between Forex demo and real accounts so you can understand exactly what you are gaining, and what you are still missing, when you start to practice trading in a demo account.
You do not want to be surprised at what you find when you make the switch from a Forex demo account to a live real money account. Brokers usually work with two separate data feeds, one for the demo account and the other for the real account.
The major differences between Forex demo and real accounts are:
Your Demo Orders are Always Executed
You do not have liquidity problems, and Forex brokers rarely requote prices, in demo accounts. However, live trading answers to real counterparties and if you want to sell a position, there must be a buyer. Sometimes, liquidity is tight, and brokers are forced to requote prices.
Execution Speed
As demo accounts just mirrors of what is going on in the real trading world, traders do not have to deal with counterparts or broker liquidity or volume differentials. In that way, orders made in demo accounts are usually executed almost instantly. You click it, and you get it.
However, when it comes to real trading accounts, retail traders are competing with thousands of other traders who want to make money. In that framework, execution can be slow depending upon market conditions and your Forex broker’s operations.
Slippage
Demo accounts respect your orders; you enter and exit at the exact price you see when you click the button, because why not? The broker has nothing to lose. However, in real money live accounts, slippage can happen. Sometimes you can get a different entry or exit price than the one you actually see when entering a market order or from a stop or limit order you have already input at a specific price. This can happen because brokers have to deal with liquidity and third parties to fill your trade order.
Stop Loss Orders
Real accounts can experience problems executing stop loss orders as sometimes prices available will not match the prices traders want in fast-moving markets. That does not happen in demo accounts as it is a controlled environment.
Prices are Different
Most brokers offer real-time prices in live accounts, but when it comes to demo accounts, prices can be delayed by a few minutes. Even though a different price feed is used, the demo feed is still based on the live feed but is sometimes delayed in its reflection of prevailing market prices. Although major banks have their own Forex price feeds, with no central price feed, they typically cannot deviate by too much, or would be arbitraged away.
Differential Spreads
Demo accounts usually offer smaller and lower spreads that do not vary at all. Most brokers use standard spreads in demos so as not to be too misleading with their marketing. However, the same broker might use variable spreads in real money live accounts which widen at moments of high volatility or decrease in extremely liquid markets, while spreads in demo accounts tend to stay the same regardless of real market conditions.
Spreads in live accounts are created through the interaction of different variables such as volume, volatility, time of trading, between buyers and sellers. It fluctuates every moment. In demos, this does not happen as quoted prices are simply replicated, not generated by any real dynamic or interactive processes.
Even when both platforms work with the same spread conventions, sometimes demo accounts fail to replicate real accounts’ spread structures. Remember that demo and real accounts tend to have separate data feeds at most Forex brokers.
Hidden Fees
Demo accounts do not have the same price structure that the brokers have in their real accounts. These include deposit, withdrawal, overnight fees, rollover, margin fees, etc. so the overall fee experience is different.
For example, if you fund your portfolio with $10,000, your broker or even your bank may deduct a deposit fee. So, you would start trading with less money than what you actually deposit, perhaps $9,900. In addition, brokers charge rollover / overnight fees, which means you will have to pay to hold your position for more than one day. This is often not applied realistically in demo accounts. For example, rollover fees are typically skewed against the trader, but demo accounts often charge rollover fees which do not reflect honestly on the real rollover fees being charged by that same broker that day in their demo accounts. Of course, rollover fees can fluctuate from day to day.
Another important topic to keep in mind is that all profits in your demo accounts are gross. You will not have to deal with withdrawal costs or currency exchanges from the money you deposit into your account and the base currency you will use in your real account – not to mention taxation.
Psychology
There is a huge difference between trading successfully in a demo account and a real live money account. Even if the prices are basically the same, and you should be able to trade profitably just the same in one as in the other, psychological factors make the two experiences feel completely different for the vast majority of human beings. The difference is perhaps best illustrated by the old trading joke about a trader who boasts he can hit a wine glass with a gun from one hundred yards away. Another trader replies, yes, but can you do it while the wine glass is aiming a bullet at your heart? In trading terms, the bullet at your heart is represented by the prospect of losing real money – a real prospect in live accounts, but something that cannot happen in a demo account.
Bottom Line
It is definitely a good idea to start your trading career by opening a Forex demo account. If you take it seriously, you will begin the process of learning how to trade, and you will benefit from it. It is not hard to find reputable Forex brokers offering free demo accounts. However, it is important that you understand that there are skills you will not develop until you trade a real, live account, with your own money at risk – because of the differences between Forex demo and real accounts. You can compare starting Forex with a demo account to learning to ride a bicycle with training wheels. You need the training wheels when you start, but you still have a little to learn even after you take the training wheels off.
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- How to Use Volatility in Forex
- MT4 vs MT5 Comparison - Which Metatrader Trading Platform is Better?
- The History of Forex Trading
- A Deep Dive into Currency Correlations
- Trading Forex with the Asian Range
FAQs
Are Forex demo accounts accurate?
Yes, Forex demo accounts are accurate, but they come with small differences regarding live platforms. Prices are real, but usually delayed by a few minutes, and price executions can vary from live trading.
What is the difference between a demo and live trading account?
Significant differences between Forex demos and real accounts are executions such as price requotes, slippage, and order activations presented in live versions but not in demos. Also, chart details like quotes delays, spreads, and fees are different.
Is MetaTrader 4 demo real?
MetaTrader 4 demo accounts are real, but they can have delays in prices. Also, spreads and fees work differently in MT4 demos than real platforms.
How does a Forex demo account work?
Also known as paper trading, Forex demo accounts are provided by brokers who want to offer educational tools to customers and gain new clients. They use different data fees to provide no risk-associated trading where customers can try platform features, understand market behavior, and test new strategies.