Demo accounts: what they teach and where they lie
What you learn in 3 minutesA demo account shows you the buttons and the arithmetic. It does not show you what happens when the price jumps and your order fills somewhere else. This lesson compares two trades: one on a demo, one on a live account, so you can see the difference in shillings before you risk any.
One pip, two fills, and a gap of KSh 1,300
| Step | Amount | Note |
|---|---|---|
| Instrument and price | EUR/USD at 1.0850 | The quote currency is USD. One pip is 0.0001. |
| Trade size | 1 standard lot | One standard lot is 100,000 units of the base currency. |
| Value of one pip in USD | 10 USD | 100,000 x 0.0001 = 10 units of the quote currency. |
| Value of one pip in KSh | KSh 1,300 | 10 USD converted at a rate of KSh 130 to the dollar. This rate varies. |
| Demo fill | 1.08500 | The demo fills at the exact price requested. No slippage. |
| Live fill | 1.08513 | The live price moved 1.3 pips before the order filled. |
| Cost of the difference | KSh 1,690 | 1.3 pips x KSh 1,300 per pip = KSh 1,690. This is the extra cost on the live account. |
The broker may round the fill to the nearest pip, charge a commission, or widen the spread. These add to the cost and vary between brokers.
The mistake people make here
The common mistake is to treat a demo account as proof that a strategy works. On a demo, every order fills at the price you see, instantly. In a fast market, the price can move before your order reaches the broker, so you get a worse price. The demo also cannot teach you how it feels to watch real money fall in value. Use the demo to learn the platform and to check your arithmetic. Then move to a live account with the smallest size your broker allows, so the first real loss is small enough to learn from.Check yourself
On EUR/USD, one pip on one standard lot is 10 USD. If the exchange rate is KSh 130 to the dollar, what is one pip worth in KSh?
10 USD x KSh 130 = KSh 1,300.
You place an order on a live account and the fill is 2 pips worse than the price you saw. Using KSh 1,300 per pip, what did the slippage cost you?
2 pips x KSh 1,300 = KSh 2,600.
A demo shows a profit of 20 pips on one standard lot. At KSh 1,300 per pip, what is the profit in KSh before any costs?
20 pips x KSh 1,300 = KSh 26,000.