Gold Trading Demo Account Benefits – What are demo accounts? Do they create overconfidence in traders? Before online brokerages started, new traders would attend physical classes to learn how to trade and use paper to record all hypothetical trades, positions and portfolios. It was also known as paper trading. However, thanks to the Internet and software designers today, users can design a simulated trading environment to download and distribute online. This is known as demo trading and comes from the word “demonstration” because it is a demonstration of how trading happens in the real world.
While demo trading is ideal for beginners to familiarize themselves with the market ecosystem, some argue that it can instill overconfidence in a new trader. Live trading conditions are completely different from demo conditions and we will discuss why.
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Demo accounts are used by both new and old traders. Karan of Safe Forex Brokers UK explains: “Demo trading accounts are a way for traders to test and learn strategies without risking their own money. This is used in all financial markets such as stocks, forex and derivatives. Day traders use demo trading to test their strategies and make money. see how each scenario would play out in a real-world situation before building.
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Demo trading accounts are designed to give new traders a canvas to practice and improve their strategies before taking the plunge with real money. They apply all the theory they have learned and see if they can profit or lose without worrying about losing real money.
Even after a new trader has read about trading and familiarized himself with all the terminology like spreads, pips, short and long positions and stop-loss orders, he still needs to test his theoretical knowledge.
Demo accounts familiarize new traders with the trading software interface and reduce the discomfort associated with live trading. New traders will know where each button is, place orders and get a general feel of the market. For example, in theory we know that stop-loss orders can be placed above or below the price of the asset, but demo accounts actually allow us to set stop-losses and provide transparency for the new trader. Old and experienced traders can use demo trading to test new trading methods and strategies before applying them to live trading.
To open a demo account, you select a regulated broker and download their trading app from the online app store or, if you prefer, use the web version of the app. The demo account is an integral part of the real trading app, so you don’t need to download a separate app for the demo account. After downloading, you fill out all the documents and open your account. Most brokers do not charge any fees for demo accounts. Login details are usually sent to your email, after which you can activate your account and access it for simulation.
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A new trader can pay for virtual trades and trade on currency pairs, stocks, indices, precious metals, etc. provided by the broker. He can also use derivative products such as CFDs during demo trading. The environment is simulated to mimic a live trading session where a novice trader can place buy or sell orders and set stop loss orders.
When you log in, you will see live trading and demo trading buttons. If you choose demo trading, it will take you to a simulated environment and you will see that you have money in your account. That money is not real, it is for imitation. Money decreases when you open trading positions or incur losses and increases when you take profits. If you lose all your virtual money, you can reset the simulation and start over.
Before proceeding with demo trading, certain truths are revealed. Some conditions will change as follows:
When you open a trade position, you need to make a reverse trade with the counterparty to close your position. There is always a ready counterparty in demo trading, so you can quickly execute your buy or sell order at the desired price.
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However, in live trading, you may have to wait in line for a ready counterparty, and by the time you find it, the price of the asset may have moved or slipped from its original price. This is called slippage and it can interfere with your trading plan and increase your losses or decrease your profits. There is no counterparty risk in demo trading, but there is in live trading.
Stop-loss orders override the real-life stop price, close your position and execute your market order at a different price. Conditions are ideal in demo trading, they may not be, so it may be a shock for you in live trading and you may experience some losses. Overall platform execution speed can be slow along with long load times, which new traders may be surprised to find in live trading.
Some demo accounts may not include all fees and commissions that apply when you trade live. When you see some unexpected fees during live trading, it can drain your balance and affect your plans.
Demo accounts give you access to large capital, and when you trade with too much capital, you become indifferent and small losses pay you nothing. However, when you are live, small losses can quickly add up because your capital is small and you are using leveraged funds.
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Emotions change when you trade live. No fear, greed or pain during demo trading. But all these feelings come alive in live trading. Your emotions will wake up and actively work against you in the trading arena.
It’s hard to bear the pain of seeing your hard-earned money dwindle and eventually disappear. It can be embarrassing to find out you’re not as good as you thought you were, and unlike demo trading, you can’t reset your system and start over. Things you take for granted in demo trading suddenly become important in live trading, and your emotions can lead to overtrading, retaliation, and sometimes panic and bad decisions. Overconfidence is another emotion to watch out for because it can be beneficial. Demo trading does not mean that you will repeat the same profit in live trading.
Swing traders who hold multiple day positions sometimes have to monitor their open positions, which can be stressful. Day traders also face a lot of pressure because they have to constantly monitor the market. However, with demo trading, you can sleep on open positions and come back whenever you want because you know that no real money is at risk. The stress level in live trading is very high.
Demo trading gives you a general idea of how to navigate and use the trading software, but improve your investment skills through daily live trading and interaction with other traders.
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In demo trading, conditions are ideal and free from manipulation, requotes, counterparty risk, stop loss, etc. But this is not exactly the case in the real world.
The whole purpose of the demo account is to encourage you to switch to live trading as soon as possible and this is part of its free offer. Some rogue brokers may target new traders fresh out of demo trading school and trade against them knowing they are still overconfident. The conflict of interest between the market maker, the broker and the trader means that the brokers benefit more from the trader’s losses than from the trader’s profits. When choosing a broker, take your time and focus on low prices.
Maybe not! Karan of Safe Forex Brokers advises, “There is no guarantee that you will get the same results as emotions play when investing real money in real-time markets. Also, trading conditions can change in real-time depending on the data feed and platform provider.
“One needs to practice for at least six months and start with a small capital, the first time they try a strategy, they can lose in direct trading.”
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Moreover, day trading in live markets is risky and requires time-tested strategies and years of experience. If you are a new investor, it is better to invest for long term rather than day trading.
Beginners should avoid markets and instruments such as derivatives, CFDs, commodities and Forex.
Hi, I’m Oliver, our online content editor. Email me at editorial.dept@ if you have questions or interesting content to submit!
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