Opening a demo account is an important first step to becoming a trader, as it allows one to practice trading in a simulated environment without risking real money. While trading on a demo, traders can become more acquainted with a trading platform, practice different strategies, gauge their preparedness to move on to a live account, and so on, which is why demo accounts are often recommended as one of the best free hands-on tools for beginning forex traders.
While these accounts offer many benefits, there are some psychological differences between the simulated and real accounts that beginners might not realize. Understanding these differences is important so that it doesn’t catch you off guard and cause you to lose money when you decide to move on to a real account.
Difference #1: Emotion
When you’re trading on a demo account, you use virtual money, meaning there are no consequences. If you take your demo results very seriously, you might care a little when you lose, but this still doesn’t compare to the way you’ll feel when real money is on the line. Once you could really lose your hard-earned money, you might become anxious, paranoid, or fearful. When you’re winning, emotions like overconfidence can lead to problems like overtrading. The best way to prepare yourself for this is to start by reading up on trading psychology so that you will more easily recognize it if your emotions begin to interfere with your trading decisions.
Difference #2: It’s More Difficult to Stick with Your Plan on a Real Account
On your demo account, it will be easy to stick with your plan because you know that real money isn’t on the line and you need to know if the plan actually works. Once you move over to a live account, you’ll be more tempted to deviate from your plan and commit trading “sins”, like moving your stop loss, cutting off winning trades early due to anxiety, or revenge trading.
Difference #3: The Reset Button
If you don’t like the results you’re getting on your demo, it’s easy to simply create a new one and start fresh. If you run out of funds, support might also be willing to top up your account with more funds. Knowing that you have the ability to start over without consequences can provide a sense of comfort because there isn’t aren’t any real repercussions. Things are much more different on a live account, however, where a blown account balance might be enough to make one want to end their career. Otherwise, you’ll have to pull more money out of your pocket to keep going. There is no reset button when it’s real and that can take away from one’s sense of safety.