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Posted on Jun 23, 2021 at 08:31 PM
A demo account is an undeniably powerful tool. You know why? It is very useful for newbies who are just beginning their trading journey and wish to “test out the waters” from a shallow end without getting drowned. Despite its seemingly interesting advantages, it’ll surprise you to learn that several other drawbacks exist too!
Apart from helping Forex newbies hone their trading skills, it also serves as a sort of “laboratory” where professional traders backtest their shiny strategies before showing them off.
Despite its seemingly interesting advantages, it’ll surprise you to learn that several other drawbacks exist too!
After all, there are no advantages without disadvantages, right?
The scary thing about these drawbacks is that when they are ignored, they may result in unexpected losses in real trading, which is not so good.
At this point, I know you’re like “Why the heck is Demo trading a disadvantage? Isn’t it a sort of ‘DIY account’ for me to flex my skills without fear?”
Yeah! And that is what we will be elaborating on subsequently in this article. Grab your jotter and a bag of chips, and let’s roll!
If you were to be asked about what makes trading from a demo account cool, your number 1 answer would most likely be as a result of the fake trading capital!
You get to select your desired instrument and trade any lot size you like without giving a hoot about your trading balance. Cool stuff.
Or who wouldn’t like that anyway? Of course, nobody wants to experiment with their hard-earned money!
Being used to the reality of having a handsome $5000 (or more) sitting gracefully in your demo account, there is a big temptation to want to take unnecessarily “premium” risks when you hit a live account.
On average, most brokers allow you to top up your demo account with virtual capital of $100,000 - $200,000. Impressive isn’t it?
The fascinating thing is that even if a general trader uses these funds with a 2% premium risk of losing position, the trader may still earn a staggering $300-$700 profit on each trade!
Sorry to burst your bubble: Before you wow out loud and begin to daydream about how much it is worth in Naira, don’t forget it is just a demo account!
On the other hand, the average balances of real accounts usually vary from $100 - $3,000, and only small lot sizes are being traded per transaction, or who doesn’t want to protect his hard-earned capital anyways?
Since the trading funds in demo accounts are virtual, traders have nothing to lose when the outcome is negative and will not gain when the outcome is positive either.
Therefore, they are less likely to take the entire demo-trading experience seriously as those trades will be placed based on fake emotions only.
On the other hand, a trader trading from a real account will take pains to carefully analyze the market and make crucial considerations before placing any position.
In extreme cases, a trader might even develop anxiety and become emotionally disturbed.
Another not-so-good attribute of a demo account is that with large unreal funds, it is easy to throw caution to the wind and blatantly ignore risk/money management.
This is justified because the initial funds in demo accounts are relatively large, resulting in novice traders totally overlooking money management.
They end up entering and exiting the Forex market repeatedly without any well-defined plan or conducted research.
Conclusively, a demo account does not always help newbies but merely amplifies their weaknesses.
It is important to note that a demo account is never going to equate to a real one.
Your demo account may be “perfect” and full of profits, but you still will never be able to withdraw from it.
It is only by trading from a real account that you will develop the required self-discipline and risk management skills to earn consistently in the Forex market.
The best way to begin is by trading from a real account and using a small lot size to help you manage your drawdowns professionally.
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