Are Forex Practice Accounts Realistic?
Despite having a successful track record in demo or practice account trading, many traders struggle to generate profit in real account trading. The performance on a demo and real account is hardly comparable even if a broker offers the same trading platform for demo and real accounts (which is not always the case). Does that mean that demo accounts are manipulated by brokers to lure unsuspecting individual to invest or trade in the Forex market? Let us ascertain whether Forex practice accounts are realistic.
To assess whether a trader can reciprocate a demo account performance in a real account, we need to first examine the similarities and differences between a demo account and a real account platform. That will enable us to answer and justify whether Forex practice accounts are realistic or not.
Differences between demo and live accounts
The trading platform offered to a demo account holder usually carries all the important features offered in a real account trading platform. Even automated trading and installation of different kinds of indicators is possible in a demo account platform without any restrictions. So, there are no technical differences between the two at the most basic level.
The currency rates shown by a demo account platform may not always match those of a real account platform. The spread will continue to remain stable in a practice account platform even during announcements of high impact news such as consumer price inflation or quarterly GDP growth. In real accounts, during periods of high volatility, spread will widen as liquidity will start evaporating. That means the profit generated during a major news announcement in a demo account may not tally with the profit generated in a real account. Quite often traders will miss the chance of entering at the desired level due to the sharp spikes seen in the price.
Further, during volatile trading sessions, a currency pair may move in an erratic or zigzag fashion. A sharp spike may take out a stop-loss order. That may not happen in a demo account. Therefore, real accounts are susceptible to unexpected early exits, trimming down the profits that could have been generated in a demo account.
Slippage is a common incident in the decentralized foreign exchange market. Since retail brokers compete for the liquidity provided by the tier 1 brokers, the price offered to a trader may change often in a fast moving market. Therefore, because of requotes, a trader may not be able to realize the targeted price during buying or selling. There may be even partial filling of an order, i.e., a trader may get only 2 out of 10 lots, and the pending order has to be canceled or updated to reflect the latest price. Such a disadvantage does not exist in a demo account. A trader will get as many lots as required at the last quoted price without any difficulty.
If a trader chooses a market execution, instead of a pending order, there is no guarantee that the price shown on screen will become the transaction price. That is the reason for the MT4 order window to show the caution message “Attention! The trade will be executed at market conditions, difference with requested price may be significant.” The trader can get either a positive or negative slippage. Such an issue does not exist while trading in a demo account.
Once in a while, time and money could be wasted in resolving broker related errors that can happen in a real account. There would be no such worries while trading in a demo account.
To sum up, even though the trading platform used by both demo and real account holder is the same, liquidity, requotes, spread, and slippage, all work differently and would considerably affect the performance of a real account trader.
Demo account size
A wannabe trader rarely gives a second thought about the virtual money available in a demo account to practice Forex trading. In most cases, a sum of $50,000 or $100,000 of virtual money is chosen. So, when a trader loses $1,000 or $2,000 while trading a single lot in a demo account, it does not seem much. In the process, disciplined trading and risk management practices are generally forgotten. The same attitude is later carried to real account trading, which normally begins with an initial investment of between $1,000 and $5,000. A series of four or five losses without proper risk management could easily wipe down at least 20% of the initial capital. The frustration would lead to further mistakes in trading. Therefore, using a large virtual capital for practicing trading in a demo account may also lead to a contrasting performance in real account trading.
Impact of emotions
Emotions play a huge role in the performance of a trader. Even those traders who are technically and fundamentally strong may find it difficult to bear nerve-cracking moments that may arise while trading in the currency markets. A demo account trader will rarely be impacted by a sudden trend reversal or a loss since only a virtual money is involved. A demo account trader can quietly watch the price movements and may even end up booking a profit in a trade that was showing exorbitant losses a while before. That is quite impossible for a real account trader. Either a stop-loss should be allowed to trigger or, if there is a big slippage, the trader should dilute the position at the prevailing market price.
After realizing a huge drawndown, a real account trader may feel nervous while entering or exiting the following trade. That would impact the profit that could have been actually made if there was no emotional attachment, as in the case of demo account trading.
When a trade is lost in a demo account, a trader will not feel stressed out. Instead, when a trader loses money in real account trading, the mind and heart will force a trader to somehow get into another trade to recoup losses, entering a vicious circle of overtrading. Usually, it will lead to a huge loss, making the trader physically and mentally tired.
A demo account trading feature provided by an FX broker should be used to fine-tune a strategy and to get a feel of a trading platform. Unlike real accounts, a demo account does not suffer from issues such as low liquidity, changes in spread, and slippage. Demo accounts are often funded with unrealistic amounts of virtual money. Furthermore, a demo account trader is not subject to emotional stress when the market turns volatile. A trader will never be able to replicate the success achieved in a demo account. From the performance point of view, a demo or practice account is not realistic. However, it is a crucial prerequisite for traders who wish to practice trading, understand platform's technicalities, get used to large price movements, tweak a trading strategy, and enter currency markets with confidence.