Demo Account: Is It a Good Trading Simulator?

For those aspiring to become traders and have not yet completed the training that will prepare them for their appointment with the market, a trading simulator is needed. This responds to a clear need shared by all: practice. Of course, theory is important and cannot be overlooked. However, if not followed by practice, the notions that have been learned with such effort risk being simply useless. Now, aspiring Forex investors, like any other asset, have a specific tool available for practice: the demo account. There can be no doubt that a demo account is a full-fledged trading simulator. However, a question arises spontaneously: is it a good trading simulator? In other words, is it capable of completing the training path of the aspiring trader? In the following article, we answer these questions, listing the pros and cons of this - nevertheless important - tool.

What is a demo account

The concept of a demo account is simple, almost trivial. It's an account "almost" like any other, made available by most brokers. It allows you to trade in the real market, as if you were actually investing. However, there is a decisive detail that makes it different from any other account: the money... It's fake. The trader, or aspiring trader, doesn't actually invest but, precisely, simulates trades. Hence another main feature: when operating with a demo account, it is not possible to earn or lose anything. Apart from the fake money detail, the demo account behaves like a real account. The trading environment is the same, including the platform and commissions (fake, but useful for understanding the profitability level of future trading actions). Demo accounts are a well-established presence in the online trading landscape. The vast majority of brokers provide one. However, the approaches to the tool and the policies for its provision are varied. Some brokers tie the use of the demo account to the opening of a real account, complete with a minimum deposit. In this case, the demo account is simply an antechamber to real trading, which takes on the characteristics of an inevitable event here. Other brokers do not tie the use of the demo account to the activation of a real account, but still provide for a time limit. Finally, others allow you to open a demo account without any constraints, neither operational nor temporal. Unfortunately, these represent a clear minority. Regardless of the broker and access policies, the demo account is still a mandatory step for aspiring traders. As already mentioned, theory must be followed by practice. This is true for all activities that have a minimum of complexity, and even more so for online trading and Forex, which are very difficult and risky activities.

The advantages of the demo account

Some of the advantages of the demo account can already be inferred from the description presented in the previous paragraph. The first and most important advantage is the ability to practice in complete safety. Simply put, without demo accounts, the aspiring trader would find themselves practicing on their own skin, risking when they most likely do not yet have the necessary skills and tools to be effective. Since the money is fake, but the market is real, the beginner can cut their teeth without breaking them. The second advantage, which is certainly linked to the first, is the completeness of demo accounts. These can be judged - at least from a technical point of view - as good trading simulators as they are well-equipped, or at least equipped like a real account. The reference is to the presence of analysis and consultation tools, as well as platform and broker functions that allow you to customize your trades. Another advantage is versatility. Up to this point, we have talked about demo accounts in reference to the needs of aspiring traders. However, this is not the only category that can benefit from them. In fact, for other categories, demo accounts are a very useful resource. The reference is to experienced traders, or those who have simply been trading for some time. For them, this type of trading simulator allows them to experiment with new strategies without having to test them directly in the real market, thus exposing themselves to significant risks. The same applies if you want to try or learn to use a new indicator. For them, the demo account offers a safe environment, with which to learn to master new tools.

The disadvantages of the demo account

Unfortunately, in this case too, not all that glitters is gold. So far, the demo account might seem like a great trading simulator, i.e., the solution to problems for beginners and experts, an effective way to practice, to seal your training path or, more simply, to increase your skills. A trading simulator that, regardless of the purpose, allows you to cut your teeth without breaking them, without risking a cent. However, it is precisely the lack of risk (which apparently is its greatest risk) that is the cause of the demo account's biggest flaw. The reference is to the total absence of the emotional component. It's obvious: if there is no risk of losing, there is no fear, no worry about losing money. There is not even adrenaline, or it is present in very small doses. Above all, stress is lacking. It is difficult for those who use the demo account to experience stress. Now, this "detail" is almost irrelevant if the trading simulator is used by an expert, who already knows the type and intensity of pressure caused by trading. However, it is a very significant and impactful limitation if the demo account is used by a beginner. In a nutshell, the demo account doesn't teach anything about emotions, about managing emotions, about the role of psychology in trading. Therefore, even assuming that the training path has been followed properly, the beginner will still arrive unprepared for their appointment with the market, from at least one point of view. Unfortunately, it is not a minor detail, given the repercussions that the emotional issue has on earning potential. To be clear, the demo account still remains a good trading simulator, indeed the best available to beginners. However, it is necessary to use it while being aware of its limitations. The risk, if you completely trust the demo account, is to take the performance produced during the trial phase as if it were one hundred percent realistic, thus deluding yourself. An illusion that can be costly. If, on the other hand, you are an experienced trader and want to use the demo account to test a strategy or a new indicator, there is no risk. You will surely have learned from your own experience how to manage emotions.