Before you begin to risk your own capital, it’s important to test drive a trading strategy and learn about a trading platform. The best way to teach yourself the ins and outs of trading is to open a demonstration account. Once you become comfortable trading your strategy with demo money, you can then attempt to trade using real capital. Each broker has a different methodology as to how they provide access to a demonstration account. You should reach out to your brokers if you have any questions about a demo account and how to use it.
What is a Demo Account?
A demonstration account is an account that allows you to test drive a trading platform before you risk real capital. Your broker will likely provide you with an unlimited amount of demonstration currency. This will allow you to test in real-time if your trading strategy works. It will also allow you to determine if you can execute trades in a timely manner. Most demonstration accounts require a deposit of real capital with a broker prior to activation of the demo account.
Testing Execution
One of the first things you should do when you open a demo account is to see how the platform works. You want to understand how the platform executes buy and sell orders. If you are trading forex, you want to make sure that you are buying or selling the correct currency when you are executing a forex transaction. You also want to test the slippage you experience when you make a trade. Slippage is the amount the security moves once you place your order. This is imperative if you are using market orders. If you have a trading strategy that is based on scalping, and each pip is key to your success you want to make sure that you are not losing a few pips each to you make a transaction.
Testing Your Trading Strategy
A demo account will also allow you to test your trading strategy. There are many strategies that look good when you test them on past data, that do not look so good when you test them in real time. A demo account will expose strategies that do not work well in real time. Even if you decide to purchase trading signals or an automated strategy, you should test the strategy using real-time data. You should also spend time testing your strategy. If you rush the process, you might get positive initial results that are unsuccessful when you test them over time.
Summary
A demonstration account is an account that works hand in hand with your real account. When you register and open a real-account, your broker will likely provide you with access to a demonstration account. Generally, a demo account has an unlimited amount of demo dollars, as well as no time limit on using it. You should test out the platform and execute trades using your demo account to make sure you don’t experience unwanted slippage. You should also test your trading strategy using your demo account to make sure it works in real-time.
