Forex 101Lesson 2

Forex Demo vs Live Accounts

It is often said that practice makes a man perfect and this couldn’t be truer

with forex trading. Most traders tend to deposit their trading capital with a

forex broker in hopes of turning their invested amount into a profit, but soon

realize that it is not as easy as it seems to trade forex. This is where a demo

trading account can help traders to get familiar with the forex markets. Whether you are completely new to trading or perhaps you want to test out a new trading strategy that you have designed, a demo forex trading account

does offer some benefits, with the main factor being that you are able to

trade in a risk free environment that is closely related to the real markets.

However, for all the benefits that a demo trading account has to offer, there are certain aspects that clearly differentiate a demo account to a live trading account.

Differences Demo vs Live

If you have traded a demo account and have been trading a live account it is not hard to miss the fact that in most cases, trade orders on a forex demo

account are usually executed with ease without any

problems. However, when you start trading the live

forex accounts, you might find that at times your

pending orders might not get filled. This is due to the

fact that the environment a trader is trading in is

vastly different from the real time markets.

Besides the order executions, other subtle differences can also come out of other

aspects:

You are never re-quoted in a demo trading environment as it is a more controlled

environment and therefore traders get sucked into a feeling of complacency. Whereas, if you were trading in a live market environment, re-quotes is

something that traders have to live with and there is no way around it.

Spreads are usually tighter in a demo trading environment. Compare this to a

real trading account and you might the difference in spreads being as much as 1 pip. This is more evident if you were trading with a variable spread broker where

the market conditions and the liquidity providers dictate the spreads

Stop loss order execution is also always executed perfectly in a demo trading environment, unlike a real trading account where traders often complain that

the broker executed their stop loss orders at a higher level thus risking a bit more than what the trader had hoped for.

The main reason as to why the differences arise between a demo and live trading environments is because of the data feed. A broker

has to pay a certain fee in order to access the live market quotes. On top of this, there are additional overheads such as liquidity

provider’s fee and so on, which makes it a bit more expensive. Because demo accounts can be opened free of cost, it doesn’t make

business sense for the forex broker to offer the same live feed and trading conditions in the demo trading environment.

The reasons mentioned above shows how different a demo trading environment can be compared to the live trading accounts. However, with all that being said, demo trading accounts

nonetheless offers traders access to the forex markets to test out strategies or to learn from the markets.

Benefits of Trading Demo

Demo trading accounts offer a risk free trading environment for the traders. This is particularly useful

to beginners in forex trading as it helps them to get accustomed to the markets. Besides the above, a demo

trading account can also be used to trade the various instruments that are offered by the broker. Although

the spreads and/or commissions may differ, they closely

mirror the real trading environment. In this aspect a

demo account can also be used to test the trading conditions provided by the broker.

Once traders are familiar with the demo trading conditions, they can then move to trading in a real

account.

Traders can then opt for a micro or a forex cent account which can help them to accurately gauge the actual trading conditions as well as the market conditions with the broker. Most brokers nowadays offer micro forex

trading accounts start with deposits for as little as $1. These micro accounts could very well be the next step for traders to test out their potential forex broker before finally opening a standard trading account.