Demo vs Live Account - What's The Difference?
You decided to take the first step towards trading currencies and potentially increasing your net worth, but how do you go about doing this? First, you must decide which broker you want to execute your orders for you. Regardless of whether you're using a demo account or a live account, the broker will allow you to put in real or fake orders into the market in real time. A quick search engine query should help you find a top tier broker. Make sure to check what the minimum requirements are to open an account and always find out all the fees involved prior to registering. Not all brokers offer demo accounts, so don't be quick to sign up before making certain that the broker you have chosen can offer you this feature. To open a demo account you may only need to create an account and supply your email for verification, but to trade a live account you will need to submit proof of identification and residence. Because brokers must abide by their country's financial laws, a US resident may not be able to trade with an offshore broker and vice versa.
After you created the account with the broker that you feel most comfortable with, you must then decide how you will start learning. A lot of beginners rush into a live account because they figure that the demo account is a waste of time, but these types of traders are quick to lose their money because they do not respect the market's rules. If any person could just open a live account and begin trading successfully, then educational websites, forex gurus, and financial institutions would not exist. The truth is that you are entering into a world where everyone is looking to take your money - at the end of the day that is the only way to make money when trading currencies. There is a balance between the winners and losers. There are many losers and few winners, but the few winners who are consistently profitable are able to amass great wealth and keep it throughout their trading career.
There are many benefits to trading a demo account, but there are also a few pitfalls that traders fail to recognize. While many can benefit from a demo account by learning the trade mechanics of forex, some fall into the trap of getting comfortable with their win to lose ratio. Countless traders who have started trading live accounts after being wildly successful in demo accounts lose their money very quickly. Why does this happen? Because these traders have not reached the emotional level required to trade with a live account. When you start off with demo account you can either put $1000 into a trade or $1,000,000 into a trade and not have the loss or win affect you. But once you begin trading with your hard-earned money, every move in the opposite direction of your predicted outcome adds to the panic that beginners face when they first start trading. In short, understand that the demo account is designed to help you learn the mechanics, but it will not condition you to keep calm during live trades - that is something that you must work out on your own.
The second problem with a demo account is that your trades are not executed in real time, they are executed instantly. What does this mean to you as a future trader? All trades must be matched up with someone else willing to take the opposite side of the trade. If you choose to buy a Euro:US Dollar (EURUSD) contract, then someone out there must be willing to sell it to you. Because the price of currencies is constantly moving, the most common type of trade is a market trade, which means that the buyer or seller (you) choose to execute your trade at the best possible price at the current moment. If at the time of your buy order the price of the EURUSD contract is 1.3650 your broker will execute the trade as quickly as possible at that price. But if the price changes to 1.3651 a millisecond after you put in your order, your broker will fill the price at 1.3651, resulting in a loss of 1 pip (the basic unit of measurement in a currency pair). On a demo account, however, this will not happen. If you put in an order at 1.3650, then you will be filled in at that price. The term used to describe the price differentiation between your desired price during the time of the entry and the actual price at which your broker filled your order is called "slippage." It is for this reason that no broker can actually guarantee that your order will be filled at the exact price that you want it to all the time. If your broker tells you that they will be able to do this, then something fishy is going on and you should search for a different broker.
There are many other problems with demo accounts that you will face when first starting out, but emotional issues, or lack thereof, and slippage are the main ones that the majority encounter. Still, mistakes are much cheaper with a demo account!