If you are new to the trading world or you are thinking about transitioning from a demo to a real account, understanding the differences between Forex demo and real accounts is of utmost importance. It’s crucial to understand what are the gains and losses, what changes once you make the switch etc. Surprises and missteps can be avoided if you approach the issue thoroughly and proceed with caution.
Demo accounts exist as training platforms where novice traders can test their skills, identify weaknesses and try out new strategies. Right away, a question arises; are demo accounts real? The answer is yes and no. The prices are accurately depicted, with live market quotes, but with a delay. Executing trades is faster and easier and traders usually show better performance in these types of accounts rather than live trading, as there’s no risk involved. With real accounts, you’re using real money – your money, thus making the risk of losing, with all the associated psychological implications, real. Brokers should work with two data feeds, one from the demo and one from the live trading account. But what are the key differences between the two? EuropeFX Academy has the answers!
1. Demo Orders are Executed At All Times
In demo accounts, Forex brokers rarely requote prices and there are no liquidity problems. Compared to this, in live trading, you answer to real counterparties and if you wish to sell a position, a buyer must exist. In live trading, liquidity can be tight, which forces brokers to requote the prices in response.
2. Execution Speed
Demo accounts are there to mirror the activities of the real trading world and thus, traders will not deal with broker liquidity, counterparts or volume differentials. Because of this, orders in demo accounts are executed immediately. You’re one click away from trading. But that all changes when it comes to real accounts. The competition is enormous, as other traders are crossing swords to make more money with the utilization of their own trading strategies, so execution speed may vary and depend on your Forex broker’s operations along with market conditions.
In demo accounts, your orders are respected – your enter and exit orders are at the exact price you see on screen when you click on the button. However, when it comes to real accounts, slippage is possible and can happen from time to time. In some cases, you might get a non-identical enter and exit price compared to when you actually entered the market. The reason this slippage happens is the fact that brokers have to deal with liquidity and third parties in order to fill your trading order.
4. Stop Loss Orders
Another potential thing to be cautious about is the problematic execution of stop loss orders which happens due to fast moving markets. Sometimes, the prices that are available don’t match the prices traders expect.
5. Different Prices
Live accounts usually quote real-time prices in live trading accounts, but demo accounts are a bit different, namely because the prices might be delayed by a few minutes. Even though the price feed differentiates between demo and real accounts, the demo is based on the live feed and can be delayed sometimes, thus mirroring prevailing market prices. Although some Forex market players, like large banks, have their own price feeds, the lack of a centralized price feed prevents any big deviations.
6. Differential Spreads
Smaller and lower spreads are usually offered in demo accounts and they don’t have a tendency to vary at all, as most brokers use standard spreads. The thing that might happen is that the same broker could use different spreads in live accounts – the spread widens when the volatility is high and decreases in extremely liquid markets. The difference with demo accounts here is that the spreads tend to stay the same, no matter what the real market conditions are.
The interaction of different variables such as volume, time of trading and volatility between buyers and sellers, which fluctuates continuously, creates spreads in live accounts. In demo accounts, the prices are replicated, but no real dynamic or interactive process is generated. Even if both accounts use the same spread conventions, demo accounts might fail to replicate the spread structures of live accounts. And remember, at most Forex brokers, demo and live accounts have separate data feeds.
7. Hidden Fees
The price structure differs from demo to real accounts and this includes deposits, withdrawal, overnight fees, margin fees, rollovers etc., making the overall experience different when it comes to fees. One important thing to consider: all profits in demo accounts are gross, meaning that you don’t have to deal with withdrawal costs or currency exchange fees from the deposited money into your account and the base currency that you’ll use in a live account.
Even though the prices are basically the same and the profitability in both places is plausible, psychological factors make the two experiences completely different for most traders. In real live trading accounts, the money is yours, thus making the risk real, which is not the case with demo accounts. Even if you’re not losing real money in your demo, you should train yourself to always keep in mind the risk and the possibility of losing your own, hard earned funds.
To conclude, the best thing for a novice trader in the highly competitive world of trading is to open a Forex demo account, once you’ve covered the basics. If you’re serious about trading, determination and durableness are key to success. Demo accounts should help you sharpen your skills, try out strategies and test out the field of trading. But be sure to keep in mind that some of the skills needed for earning profits in the Forex market can only be gained through live trading, on a real account, with your own money at risk. After the transition is complete, you will gain more confidence, but also additional knowledge and experience, which will, in turn, help you become a successful and profitable trader over time.