What is a Forex Practice Account (Demo Account)?

What is a Forex Practice Account (Demo Account)?

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    Demo Account - Alvexo

    The Pros and Cons of Using a Forex Demo Account Versus a Live Account

    Alvexo’s demo account is a training tool that enables traders to practice trading without endangering their personal capital. It provides access to all of the company’s trading platforms and most of its trading assets, and is provided with an initial but virtual balance of $50,000. One may not transfer funds (certainly not virtual funds) between demo and live accounts, and you cannot examine your trading history from one account through the other. A demo account may be used by beginners to learn the basics of Forex trading or by experienced investors to formulate and test their investment strategies.

    Unlike some competing demo platforms, Alvexo’s is identical to its live platform – not merely vis-à-vis the tools provided and by providing the same price feeds and spreads, but even to the extent of minimal slippage levels and live data.

    And yet, beginner investors will often find that upon switching from a demo account to a live one, their performance suffers and they do not succeed in replicating their previous success, based on which they decided to invest real money.

    Thanks to the rapidly increasing regulation of the Forex industry, platform manipulation is not an option; the fault lies with the individual, and we must delve into the psychological differences between investing imaginary money and trading with money that has been earned and – once lost – cannot be recouped.

    Balance, Equity and Emotions

    To begin with, most demo accounts offer a $50,000 starting balance and traders watching their bottom line see that, with the 400:1 leverage they are receiving, their profits are huge. After several successful trades, they cautiously open a beginner’s account, investing $500 and perhaps getting an extra $500 in bonus funds. Obviously, their successful trades show less returns, so they invest a higher percentage of their equity per trade and insist on the maximum leverage in order to duplicate their previous success. Over-leveraged, they deplete their account within weeks. The solution, of course, is to either request a smaller demo account balance or, better, to request a much lower-than-maximal level of leverage. Also, the beginner should remember that his/her profits on a beginner’s account will be small, and religiously limit each investment to 5% of one’s equity. Profit and loss will be smaller, but – with practice – the excitement will remain the same.

    The second problem when shifting from a demo account to a live one is emotions.

    Ironically, research shows that people tend to make more mistakes and take greater risks when playing with real money than with pretend money. [1] This is due to a state of heightened emotions that precludes the logical thinking associated with objective actions taken under less threatening conditions. In short, trading real money is fundamentally different from trading pretend money, and people act in a completely different manner under duress.

    Sadly, the first component of safe trading to be abandoned with the onset of tribulation is strategy!

    As soon as a trader begins to really lose his/her own money he/she panics and either forgets the original strategy or, in an abandonment ostensibly justified by that strategy’s ‘obvious’ failure, begins to trade haphazardly.

    The best way to counter this is by consciously neutralizing emotions from trading. Ensure that before making your first deposit you (and your spouse) have mapped out your monthly income and expenses, and decide upon a sum of disposable income you can afford to absolutely eradicate. Then, begin with investments so small that leveraged losses will not ‘hurt’.

    Invest time and consideration in mapping out your strategy while still using your demo account. If over a considerable period it worked there and you have not strayed from it, there is no reason for that same strategy (adapted to market realities of the moment) not to work once you have ‘gone live’. However, no strategy is totally fool-proof all of the time; it should be tested, then applied over an acceptable time period.

    Be prepared to lose, at first, and accept momentary losses as an integral part of the investment process. Remember that a trader is one who makes more trades than one, and, at the end of one year, compare your losses with your profits and gauge how Forex is treating you.

    Do not let your wins or losses change the game-plan: just as you wouldn’t move a stop-loss, do not start playing with your risk level by increasing your exposure to recoup losses or capitalize on gains. Each loss and gain is a thing of the past and not to be considered when planning your next trade.

    Withdraw your profits regularly. It lowers your stress and raises your confidence; and both of these will immunize you against emotional misdeeds.

    And finally, remember that a Forex practice trading account is there for you to practice with. Use it for as long as you need to, but once you go live, it’s an entirely new game.

     

    Ready to open a live account? Register here.

     

     

    [1]               Elior Kinarthy, The Psychology of Investing, Xlibris Corporation, 2009, p 78
    Cole T. Barrett D. Griffiths M. “Social Facilitation in Online and Offline Gambling”, Int’l Journal of Mental Health Adiction, Uni. of Leicester, UK, July 2010
    “Why is real-money-betting necessary for poker to be fun?” Board & Card Games, http://boardgames.stackexchange.com/questions/2088/why-is-real-money-betting-necessary-for-poker-to-be-fun

     

     

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