The Good and Bad of Demo Accounts for Traders

Most brokerage platforms now offer a practice trading account, also known as a simulator. What’s the purpose? The goal is to help new as well as seasoned traders get familiar with how to place orders on the platform, learn about the different kinds of orders, and manage their funds. Do the various simulators and demos work? In other words, do people gain skills, confidence, or anything else from using them? Here are some of the pros and cons of practice accounts.

Teach the Mechanics of Trading Quite Well

If you need to learn how to place limit, stop, market, and other types of orders, simulators are the way to go. There’s probably no better way of acquiring the essential skills needed to do your own trading. Consider the fact that licensed brokers use sims a lot during their employment training. It’s important to know how to log into your account, do research, view relevant news items, and place various kinds of orders. If you don’t yet know how to do those things, use a demo.

They May Not be Good at Teaching Money Management

Most platforms put several thousand dollars into fictitious accounts. The vast majority of brokerage sites don’t offer you an alternative to use a smaller amount of money. That means you won’t get the chance to actually feel your losses as much. When operating with $50,000 in fake money, you won’t be as careful with your purchases. It’s normal to say, “Oh, well. If I lose out on this trade, I can make up for it on the next one.” In real life, you likely won’t be able to absorb so many small losses and still have capital left in your account.

Excellent for Testing Strategies

For intermediate and advanced users, the situation is a bit different. That’s because simulators are the ideal way to try out new ideas and strategies. You can spend fake money to learn how your fresh approach might work. Granted, sims don’t replicate real-world conditions 100 per cent, but they are capable enough for testing theories and trading tactics. Seasoned traders often return to the simulator every so often. They do so to sharpen their reaction time, hone placement skills, and see whether an idea they read about has any potential.

Order Timing and Filling is Hard to Simulate

A practice trading account can be a tough way of teaching users about partial-fills, slippage, and several other quirks of order placement and fulfilment. For example, in the real world, not all orders are filled to the specified level. If you want to buy 100 shares of XYZ at $40 each, you might get half that amount because no seller if offering that many at that price. In fact, it’s very common to see partial fill on your dashboard after a trade has executed.

Most of the simulators fill 100 per cent on every transaction. That means users don’t get a true-to-life experience of the process. But there’s another aspect that doesn’t match reality, and it relates to something called slippage. When you place a market order for any security of any amount, the prices might be rising or falling so fast that when your desired dollar value is hit, you don’t get filled at that exact price. Suppose ABC is swinging wildly up and down in value when you’re at market purchase price is touched. Even if it takes just a few seconds to go through, the share price of ABC might have changed by the time you get your fill. What’s that mean to you? It means you might end up paying more to buy or getting less in a sale of, ABC. The bottom line for traders is that sims, bots, demos, and all other types of practice accounts just don’t have the technical sophistication to simulate all the ordering nuances out there. For basic lessons in purchasing and selling securities, they do a good job. But when it comes to reflecting real-world conditions, they fall short.

They Build Confidence in New Traders

Without a doubt, demos are perfect for getting rid of the jitters that inevitably come with doing your own buying and selling on a brokerage platform. Will you still be nervous while placing that first real trade with your own hard-earned cash? Of course, you will. But after a week or two on the simulator, that first-timer nervousness won’t last long. People who jump into real-money deals often lose significant sums of money on careless errors, like faulty order placement, or entering the wrong ticker symbol into the buy box.