Trading is not child’s play, and that’s why you need to hone your skills with virtual money before you put your actual cash on the line. If you are a beginner, you will not miss noticing just how numerous different trading platforms are.
It can get quite challenging for beginners to know the best platform to use, considering how enticing some of them can be. Demo accounts help beginners sharpen their skills and evaluate the various platforms and know which ones best fit their aspirations.
Most demo accounts simulate the actual live market, and this explains why you treat your trading on these accounts with the same seriousness as the live account.
With a demo account, you will learn the basics such as how to place different orders, how to take profit and place stop loss. You will learn about how to optimize your returns using differences in spread etc.
As time goes by, you will know how to use different technical analysis tools, which lot sizes to go for, etc. Importantly, such an account allows you to learn about your strengths and limitations as a trader.
Why you need a demo account
Demo accounts mimic real-world trading accounts
Demo accounts are built to simulate the workings of real trading accounts. Therefore, for you to optimally apply your trading skills, you should use your demo account with the same level of seriousness as a live account.
This should apply to both your technical analysis and the amount of virtual currency used. For example, if you intend to use $50,000 to trade live, you should use an equivalent amount of virtual currency in your demo account. This will help you to maintain financial discipline and trade under real market conditions.
In addition, restricting yourself to the amount equivalent to your real-world future investment will also help you to avoid taking risky levels of leverage when you finally transition to trading with real money.
Knowing your “ideal” trading capital will also help you get used to trading within your abilities, instead of trading with an amount of virtual capital you wouldn’t be willing to risk in live trading.
Demo accounts help you improve your handling of lot sizes
Assets in securities markets are traded in tranches known as lots. Each lot has a fixed amount of assets. A demo account enables you to know how to minimize your risk exposure by helping you appreciate the difference between choosing a smaller and a bigger lot size.
For example, by using your demo account to trade forex, you will know how to balance your lots’ distribution among standard, mini and micro-lots. Choosing the right blend of lots not only minimizes your risks but can also optimize your profits.
For example, you will learn that standard lots of 100,000 EURUSD units will cost you more in spread-related costs and that using a micro-lot would significantly reduce your risks as a beginner.
It is also worth noting that different lot sizes translate to different price movements. For example, a currency pair with USD as the counter currency will have a $10 price change for each pip movement in a standard lot, while the corresponding pip movement in a micro-lot will only be equivalent to a price change of $0.01.
You will also realize that some trading platforms will allow you to blend different lot sizes while others won’t. Using different demo accounts should enable you to know whether you would like to trade using mixed or unmixed lots. It is advisable to use platforms that allow trading using different lot sizes.
A demo account enables you to evaluate the customer service quality of different trading platforms
Through your experience with the demo accounts of different firms, you will be better placed to know which one(s) offer the best customer support by assessing factors such as their response time, advisor services, whether they offer actual 24/7 support, etc.
Benefits of using a demo account
- Demo accounts are offered for free to anyone interested in trading. In addition, most platforms offer demo accounts for an unlimited time, meaning that you can take as long as you want to learn and sharpen your skills and strategies.
- Demo accounts have all the tools necessary to help you exercise your trading strategies and conduct your technical analysis.
- You may be trading with virtual currency in demo accounts, but they imitate the actual live market conditions. Therefore, your transition to the live market will be seamless and without surprises if you exercise appropriately.
- There is room for making mistakes without incurring financial losses. You can therefore learn with confidence and avoid costly errors using virtual currency.
Bottom line
Demo accounts are invaluable tools for all beginners. They provide a good experience, similar to real-world trading, and can help you become an expert trader. However, to succeed, you must trade with your demo account with the same level of seriousness and dedication before you transition to a live account.
