Simulated trading is a resource for both beginners and experts. It's an activity conducted through specific tools, which are available to everyone because they are now offered by almost all brokers of a certain level:
demo accounts.
In this article, we discuss simulated trading, how it works, and the advantages and potential disadvantages it brings to the trading experience.
What is simulated trading
Simulated trading is exactly what its name suggests - the activity of simulating trading. The operational basis is always the demo account, which replicates the real account and refers to the actual market, but where
orders are not actually executed. Consequently, you operate with fake credit, usually fixed at 100,000 euros (or dollars, depending on the platform).
The demo account was born as a marketing tool, to be honest. It was conceived as a sort of product trial that could somehow attract traders and subsequently convince them to operate with the respective broker. Almost immediately, it became a resource for refining skills, if used by beginners, or for experimenting with techniques and strategies, for more experienced traders.
There are various types of demo accounts: timed or without expiration, paid or free. However, over the last few years, the offer has converged towards a precise structure: demo accounts available following the initial minimum deposit, and therefore after opening a real account, and without expiration. A small sacrifice, considering that initial minimum deposits have decreased significantly.
The pros and cons of demo accounts
The biggest advantage of demo accounts is "trying out" the trading experience in complete safety,
without the risk of losing a single cent of your capital. This is not a minor detail and, above all, benefits all categories of traders. Beginners can thus experience investing without a risky trial run, and complete their training with a true, abundant practical session. Experienced traders, on the other hand, can use demo accounts to test new strategies, new indicators, and new assets.
Another benefit of demo accounts is the general
realism they are imbued with. The market is real, so the simulation is perfect from this point of view. The trading environment is also quite realistic, as it faithfully replicates what the trader will encounter once they start trading with a real account.
What about the drawbacks? Well, only one is reported, but it is "big" and unsolvable. The demo account says nothing about the true uninvited guest - emotional pressure. It arises from risk and can compromise the effectiveness of the investment action. Unfortunately, those who operate with a demo account do not experience this risk, so they cannot physiologically learn anything about "management techniques" for the psychological sphere. Obviously, this disadvantage only concerns beginners and not experts who, at least theoretically, should have already developed skills in this regard.
How to approach demo accounts
Therefore, the demo account must be managed carefully if you want to transform
simulated trading into a real resource. Here are some tips that are valid for everyone, beginners and beyond.
- Know the strengths and limitations of demo accounts. This allows you to avoid easy enthusiasm and thus consider mere "sensations" as irrefutable evidence.
- Take all the time you need. How much time should you spend on demo accounts? Well, it depends on your goals and starting point. Review your needs and only then decide on a horizon.
- Design a complete experience. If you are a beginner, it's good to try out "at least a little" of the vast range of situations, events, and dynamics that can emerge during "normal" trading activity. Therefore, don't hold back if the goal is to learn or, rather, complete your training.
