| Updated: November 16, 2024- Jump to:
- How It Works
- How to Use It
- Demo Balance
- Leverage
- Trading Strategies
- Copy Trading
- Pros of Demo Accounts
- Demo to Live Forex Account
Investing real money in the foreign exchange market before getting familiar with it is a huge mistake and we risk losing all our money if we do it. Instead of just wasting money that way, traders can join the foreign exchange market by registering a demo account and practicing Forex trading with virtual money. Demo accounts are supported by just about every major Forex broker, so it is fairly easy to find a firm that offers this type of account.
The demo account is the perfect opportunity for novice traders to get familiar with the Forex market, find out how it operates and learn more about its specifics. Moreover, this is a great way to learn how to use the trading platform supported by their preferred broker.
You will not find a successful Forex trader who hasn’t used a demo account during his career, because it is impossible to learn how to trade without practicing. Demo accounts are even used by experienced traders because they provide them with a quick, safe and free way to test different strategies and tactics.
How Do Demo Forex Accounts Work?
In trading, the demo account is a type of user account offered by a trading platform. It is funded by virtual money and its purpose is to simulate real-life trading without any financial risk. Known as paper trading among stock traders, demo trading seems just like regular trading – you select the currency pair or stock you wish to trade and you place an order. Then, you can watch what happens next to see whether your trade is profitable or not.
Demo or paper trading accounts are almost identical to the real thing with one small, yet crucial exception – the transaction involves no actual money. Instead, it is purely virtual. These demo accounts became available in the late 1990s and early 2000s when the Internet made trading on the global markets available to the public. With the development of faster and more complex software platforms, demo accounts became wide-spread. Soon, they proved to be an invaluable tool in trading, whether for educational or simply testing purposes.
Those who want to become successful traders on the Forex or stock markets need to learn how to take advantage of the trend, read candlesticks, bars and charting data. The demo account gives novices access to all these tools and traders can use them to try and predict the price movement of a specific currency pair.
How to Use a Demo Forex Account?
Forex trading is quite popular and is often considered simpler than trading stocks or other types of securities. But in fact, it requires skill and a good perception of the financial markets. Learning and developing tactics and trading strategies is also very important for long-term success. Often, traders spend months testing different types of strategies, exploring different markets and economic trends with demo accounts at one or more Forex broker.
Demo accounts are supported by trading platforms and usually, platforms are provided for free by the brokers. Usually, traders can open a demo account with just a simple sign-up process, in which they provide only basic personal information. In comparison, registering and verifying a live trading account typically take at least one business day – traders are required to disclose detailed information about themselves, including full name, physical address, phone number, banking or credit card data, complete with a copy of their ID.
Opening a demo Forex account at a random brokerage website would not be useful. To make the most of simulated trading, traders or investors should keep a close eye on their demo account for a while. There are several fundamental things they need to learn before starting to trade from a live account and risk real money.
Demo Balance
Most Forex and CFD brokers on the Internet offer demo accounts with up to $100,000 in virtual funds. And while this practically unlimited demo balance seems very attractive to prospective traders, it is highly unrealistic. Most professionals have entered the world of Forex with much less impressive capital – $1,000 or even less.
It is, therefore, important that traders start with a demo balance that is as close as possible to the actual trading equity they will have. This could be $1,000 or $500. Having an unrealistically high virtual balance could result in practicing risky or complex trading strategies, suitable to experienced traders.
Leverage
One of the most important things novices need to learn is how to use leverage in Forex trading. Leverage is a borrowed capital that allows traders to buy and sell much bigger volumes than they would with the capital they have. In other words, they can control positions that are much more valuable than the money they have in their account. Leverage is offered by Forex brokers and is usually displayed the ratio of the trader’s funds to the size of the broker’s credit – or vice versa.
For instance, a trader with $50 in funds who takes leverage of 100:1 will be able to control $5,000. Leverage is quite common in Forex since traded volumes are really large. It is also popular among traders because the potential profits from a successful trade are much higher than normal. However, leverage is also a double-edged sword since it can also amplify losses. For this reason, novices should learn how to use it properly without risking too much. The recommended leverage for unexperienced traders’ demo accounts is 10:1 or 20:1.
Trading Strategies
After choosing the best conditions for the demo account, Forex traders can proceed to test different trading strategies with it. Forex trading strategies are simply those techniques used by the trader to help determine when to buy or sell a currency pair. These decisions are made based on the so-called trading signals and use either technical or fundamental analysis. In simpler terms, traders can develop a strategy following the movements they notice on the basic trading charts they use or after analyzing economic trends and news updates.
There are various trading strategies out there – they can be found online or created by traders themselves. To make sure they are effective, however, strategies must be tested and this where demo Forex accounts have proved to be extremely useful. Traders should try to stick to one particular strategy for one or even two months, even if it results in losses. When trading from a demo account, such losses are not crucial – they can only demonstrate how the strategy works and whether it is worth using with real money.
Copy Trading
Copy trading, also known as social trading, has become very popular in the past few years. It allows traders who use the same software platform to join a community, communicate with fellow traders, and, most notably, copy the trading strategies of successful traders. There are, in fact, dedicated social trading platforms designed to connect traders and help them share their experience with others.
However, copy trading is a risky type of investment and is not recommended for beginners without any knowledge of the market or money management skills. Some inexperienced traders decide to copy the entire portfolio of a trader they follow on the trading network. Others copy particular trades, hoping to make a profit. Doing so randomly and with real money can end up in losing one’s entire balance.
This is why traders should use a demo account if they wish to try this exciting and relatively new type of trading. With a demo account, they can copy different trading strategies in virtual mode – test them for some period of time, analyze them, and determine whether they are profitable or not.
Benefits of Demo Accounts for Forex Traders
The benefits of opening a demo Forex account are quite obvious but often overlooked, especially by traders who already have some experience with the foreign exchange markets. First of all, a demo account allows you to access the markets and practice trading under real market conditions. This is useful for both novices who want to learn the basics of Forex trading and experienced traders who wish to test a new strategy.
Another advantage of demo accounts is that traders have access to a nearly unlimited amount of virtual money. This means that after a while, they can start opening large-volume trades and learn how to calculate their profit/loss or see how risk and leverage actually work. Trading bigger volumes also allows them to get familiar with some of the popular Forex trading methods.
By opening a demo account, traders get a great opportunity to become more familiar with the interface of a given trading platform and the trading conditions offered by a broker. Practically all software platforms are promoted as fast, convenient to use and having great functions and features for both novices and professionals but in reality, not all trading systems boast great performance and fast execution. The only way to experience its strengths and weaknesses is to test it using a demo account.
Transitioning from Demo to Live Forex Account
Trading with real money is not the same as simulated trading. In reality, markets can often fluctuate in surprising ways. This is particularly true for the Forex market, which is decentralized and trading occurs 24 hours a day at thousands of computers all over the world. The value of currencies may change within seconds based on currency and economy news. This is why transitioning from a demo to a live trading account is so important.
Traders should keep in mind that when they start trading with real money, they will need to be much more careful. Moreover, they will often be influenced by their emotions since they are risking actual money. However, relying on emotions is a huge mistake because it may result in rushed decisions and poor interpretation of trends. Novices should learn to suppress emotions and instead, make decisions based on the information they have.
Once they spend enough time with a demo Forex account, they may sign up for a live one. It is highly recommended that traders use their demo account as if they were trading with real funds. This means that they will invest small amounts of money and try to minimize the risk of losing. The best idea is to spend at least a month trading with a virtual balance before investing real money into the trading account.
With a demo account, traders can create their own trading style and prepare a set of strategies and systems that they will use throughout their careers. They should never hesitate to open a demo account at their current Forex broker or a new brokerage online when they want to test something new. After all, it is always a bad idea to risk real money with a new trading strategy.