Every beginner trader will certainly know what demo account is. According to Investor Guide, a demo forex account is a sort of a virtual training program where you get to operate in a totally risk free environment. It functions as an account that allow traders to practice using the platform. Besides, you can access prices in real-time, and make transactions with virtual funds. Thus, it has a vital role in the process of learning forex trading.
However, demo accounts turn out to be a hidden danger for traders. A successful trader on a demo account may not be able to repeat success on a real account. It happens because demo accounts do not involve real money. This practically eliminates important factors that you need to master in trading decision making, that is psychological stress when facing the risk of real losses.
Remember, you will not suffer any material losses when trading on demo accounts. However, if you use it too long in that account, it can prevent you from mastering the skills needed to earn consistent profits on a real account. Thus, a demo account not only gives traders positive sides but also negative sides.
Let’s look at the 3 dangers of a demo account in trading:
A demo account is actually a learning tool that works to make it easier for you to practice trading. However, when you use it for too long, the convenience of a demo account is vulnerable to being misused to underestimate trading mistakes. As you well know, a demo account uses virtual funds. Thus, when a trading position is losing, there is no real loss you receive. When a trading error does not have a significant impact, it will be easy for you to underestimate it.
Some traders have misused demo accounts function as a forex learning tool. Precisely because it doesn’t use real money, you can be freer to learn from mistakes. If you are willing to correct trading mistakes only if you are already struggling on a real account, then what is the use of the demo account?
Does not improve risk management
One of the reasons why many beginner traders find it difficult to make profits is the habit of cutting profits and allowing floating losses. To overcome this problem, you can use Stop Loss and Take Profit, which is part of risk management. Besides, there are also manual alternatives such as doing averaging, adjusting the trailing stop, and many more.
However, the advantages of a demo account that does not carry real risk. Thus, it makes easy for you to underestimate the importance of risk management. Thus, it will become a danger if you explore it too long. Since you are already comfortable with those conveniences, you do not think about your risk management.
When it’s time to trade into a real account, your expertise in managing risk is not honed. In fact, it is precisely this aspect that is the key that is important to survive in a real account.
Creating bad habits in trading
Most of the ways to trade on a real account are habits that you do on a demo account. Whether you realize it or not, bad habits on a demo account will carry over to a real account, even though you always promised in your heart to be more alert after opening a real account.
To change and adjust to real account conditions, it takes time and some real losses that motivate you to change into a better trader. In some cases, bad habits can be more fatal if it has been burdened by psychological pressure from the risk of trading with real money.
For example, when you are accustomed to widening the Stop Loss distance for no reason on a demo account, you will repeat it when trading on a real account.
Writer: Fenda Agustina