Forex Demo Account: Are Demos A Scam?

You can open a forex demo account with most if not all of the major forex brokers on the internet, but are they really such a great deal? Are there dangers in having a forex demo account? Should everybody use them, or are there some situations where you would be better off avoiding them? What is in it for the broker, and should we be suspicious of that?

Let’s take the last question first. Why do brokers offer free forex demo accounts? There are two generally accepted answers: first, because their competition offers them, so they have to match that or do better to stay in the market. That seems to benefit the trader alright, so no problems there.

But the second reason is that they benefit the broker. As soon as you sign up to a demo account, you are investing your time in learning how to use that particular broker’s system. The chances are that unless you find something significantly better, you will stick with it and give them your money when you want to go live, because the alternative is going through that whole learning curve again with a new platform. So brokers may be able to get away with a worse deal on spread and other costs by hooking you in with a super cool demo account with all the bells and whistles. Watch out for that one: while not exactly a scam, it is not necessarily in your best interest.

The second thing to watch out for when you are using a forex demo account is that you do not make the mistake of assuming that demo trading and live trading will feel the same. Sure, you can use demo mode to test your system, learn how to use the platform and set up your technical analysis tools as you want them. But you cannot necessarily assume that just because you are successful in demo, you will be equally successful trading for real.

Why is this? Mainly because it feels completely different when you are risking your own money. Trading a position size of 10,000 virtual dollars may give you a minor thrill, but trading a $10,000 lot for real can be terrifying at first. It is hugely stressful when you first go live, and most people do not make their best decisions under stress.

So the biggest risk with using forex demo accounts is that you may become over confident. You could be doing great in demo mode, then transfer to trading the same lot sizes for real, thinking you cannot lose. Within a few days all of your money could be gone.

The way to avoid this is first, do not go live until you are sticking to your system with iron discipline, knowing exactly what to do in all cirumstances and doing it 100% of the time. This is just as important as being in profit. If you can do this, you have a good chance of sticking to the rules of your system almost equally well when you start forex trading for real.

Second, when you first go live, start small. Even if you have enough money to start with a mini account, open a micro to begin. Watch how you act under stress, especially when things are not going well. Do you stick to your system or do you make snap decisions? Again you can move up to a bigger position when you are acting consistently as well as being in profit, not before. This is the best way to use a forex demo account.