Trading Using Forex Demo Accounts – the Pros and Cons of Practicing Currency Trading with Forex Brokers
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Is a Forex demo account still relevant in the modern context of investing in the financial markets? Currency trading, more popularly known as Foreign Exchange or Forex trading, is no longer a new concept in the financial markets. It sees trillions of dollars’ worth of money transactions changing hands within a single 24 hour cycle. Speculators, banks, hedge funds, institutional investors, and retail traders make use of this attractive opportunity to cash in on the profits by betting on the price movements and currency fluctuations. Forex trading, in its most modern sense, is not confined to currency pairs alone. In fact, Forex trading today encompasses a wide variety of markets, which offers CFDs on indices, commodities, stocks, bonds, precious metals, and ETFs. Together with the 24-hour nature of the Forex market, Forex trading continues to grow in popularity at an unprecedented rate.
However, with the inclusion of global investors and retail traders from all over the world, there is a huge chance that traders might be inexperienced at dealing with the volatility and inconsistencies of the market, which can lead to severe losses. Professional traders such as hedge funds, banks, and expert traders have been known to have an extensive amount of experience in the market. Allowing them to control their risk and modulate their market exposure according to their invested capital. Retail traders, especially amateurs and beginners, are largely unaware of the dynamics of market movement and very susceptible to severe losses if they are unable to read the market conditions accurately.
Therefore, to enable traders to learn the fundamentals of trading in the Forex markets, FX brokers typically offer access to a demo trading account. A demo account is capable of replicating the market through simulated trading conditions. Forex demo accounts are virtual trading accounts that contain virtual trading capital, thereby eliminating the risk to traders. Demo trading Forex accounts are excellent options for both amateur and professional traders to test their trading strategies through a no-risk environment. Thereby enabling traders to preserve their trading capital against market eventualities.
Forex demo trading does not incur any profit or loss and is more or less similar to trading the markets on a live trading account. However, there are significant differences between Forex demo accounts and live accounts, which also lead to several inconsistencies in trading. In this article, we’ll point out the fundamental differences between demo and live trading, and how traders should approach the market through proactive trading.
How to Open a Forex Demo Account to Practice Trading Currency
Almost all Forex trading brokers in the industry offer a free FX demo to clients enabling them to practice trading currency using virtual trading capital. In most instances, traders will be required to sign up for a Forex practice account and follow all the procedures involved in opening a live trading account. However, they will need to verify their identity at the time of registering a live account. These free demo trading accounts usually have no trading restrictions unless there are regulatory guidelines on trading such as the CFTC FX trading conditions that are applicable in the US.
Regardless of the free availability of a free Forex practice account, some brokers may require traders to either pay for a demo FX account or register for a live trading account and deposit a minimum amount of trading capital. In such cases, traders might be at a disadvantage, since demo accounts are supposed to be indicative of the overall efficiency of a broker’s services and trading platforms. Preferably, Forex demo accounts should be free of cost and offer traders the opportunity to get acclimatized to a broker’s trading platforms and their specific trading conditions.
Forex brokers will have dedicated pages that provide easy and intuitive access to clients who want to open a demo account. Even live account registration pages will make mention of a demo account. But failing that, traders can get in touch with a broker’s customer service department and ask about opening an FX demo. Demo trading accounts are relatively straightforward and easy to use, and traders can access their demo accounts through a simple login.
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What Are the Basic Specifications of FX Demo Trading Accounts?
FX trading demos may have different trading specifications according to the broker’s different products and services. Generally, Forex brokers only offer a single type of demo trading account that will have the best trading conditions the broker has to offer. Most Forex practice accounts have a nominal starting capital of $100,000, which is the absolute minimum trading capital required to open a single lot contract. Of course, brokers may offer different minimum margin requirements and micro trading capabilities, but most brokers are consistent in their approach and offer a fixed $100,000 demo. It’s also common for Forex brokers to set their demo trading capital at $10,000. But on other occasions, brokers may allow traders to specify the starting capital. It would be great to choose a Forex broker that lets you specify your own virtual trading capital for a demo, as this allows you to set a realistic account balance directly related to your trading account.
The leverage for a Forex demo is usually changeable, as traders can choose their leverage option at the time of opening an account. While live trading accounts have the option of changing the leverage according to the trader’s risk appetite, changing leverage in a demo account is slightly more complex. Nevertheless, traders should be able to modify their trading specifications by altering their contract size and risk percentages, allowing them to try out new strategies to find the winning formula.
Other Forex Demo specs may include the type of orders, the cost of trading, commissions, SWAPs, and market protocols. While a demo account simulates live trading, the spreads quoted in a demo Forex account should not be taken at face value as representative of the spreads and cost of trading. Sometimes, demo trading accounts may not charge SWAPs or commissions for overnight trades, while the spreads may also be highly inflated. Therefore, you should understand that the trading specifications for a Forex practice account are entirely different from a real trading account.
Is a Forex Trading Demo Available on All Trading Platforms?
Forex trading is facilitated through leading trading platforms such as MT4, cTrader, JForex, Trading Station, NinjaTrader, and other proprietary trading platforms solely developed by Forex trading companies. MT4 demo accounts are among the most popular Forex practice accounts in the industry, mainly due to the extensive reach and global preferences of the MT4 terminal. MetaTrader 4 is primarily a market maker terminal and inherently different from Direct Market Access (DMA) trading platforms such as cTrader. Therefore, there may be visible differences between trading on an MT4 demo account and a cTrader demo account. Traders may also notice further differences between the demo offerings of third-party platforms and proprietary trading platforms, as proprietary and branded platforms may have exclusive services and features that are normally absent from third-party terminals.
Almost all trading platforms provide access to a demo trading option. Hence, it is possible for traders to test the reliability and performance of all leading Forex trading platforms by signing up for a Forex demo account. This helps traders to evaluate their different options and choose a platform that suits their requirements.
What Is CFD Trading and How to Trade Using a CFD Demo Trading Platform?
CFD is a term used for trading certain financial instruments known as Contracts For Difference (CFD). In normal trading such as trading stocks and indices, the underlying assets are actually owned by an investor. Therefore, traders will have to account for the liquidity in the market, availability of shares, and the cost of owning such instruments, along with the restrictions on scalping and short-selling. CFDs, on the other hand, are contracts between two parties to exchange the difference in price between the entry and exit point. CFD trading does not involve owning stock of a financial asset, but it mirrors the movements of the financial markets. A CFD for a financial product essentially allows a trader to speculate on the price movement of a product, and one that allows a trader to easily get out of the markets to take a quick profit or a loss.
CFDs are available as tradable products for a wide variety of financial instruments, including Forex, commodities, metals, indices, shares, ETFs, and bonds. CFDs are offered as market maker financial products, where the broker may choose to be the counterparty to a contract, or match traders with other clients, where the contracts are filled at market price. CFDs, due to their leverage nature of trading, have an incredible amount of risk and conflict of interest, which may not be suitable for all traders.
A CFD demo trading account is the best platform that allows traders to learn about the different aspects of investing in the financial markets without risking their money. A vast majority of FX trading companies offer CFD products to grant access to the largest variety of tradable products. But it does require a trader to have a proper understanding of the CFD markets before investing. Therefore, if you are looking to access the CFD market, make sure you learn the concept of CFD trading through a CFD demo account before investing.
Using a Forex Practice Account to Your Advantage
It’s imperative for a trader to demo trade the Forex market before opening a live trading account. Here are a few factors you should consider. They may help you use a Forex trading demo account to your advantage:
- Risk-Free trading – A Forex demo account offers the convenience of sampling the financial market with zero risks to the trader. A trader starts with virtual trading capital, which is not linked to the trader’s bank account or his investments in any manner. The main benefit of a demo FX account is the risk-free environment, which gives great freedom to the trader to invest in any manner as they desire.
- Understanding the concept of trading – Forex trading is a relatively easy concept to master, but understanding the dynamics of the market is a complex task. By trading using a demo account, it’s easy for a trader to learn the concepts of Forex trading without losing their hard-earned money.
- Evaluating a Forex broker and the Trading Platform – Demo trading is not only suitable for beginners, but professional traders also use Forex demo trading accounts from time to time. A demo account can be used to analyze the performance of a broker, and evaluate the overall services of an FX trading company. Of course, there are differences between a real and a demo account, but traders should be able to get an overall picture by trading on a demo account.
- Experimenting with strategies – A demo account is the best option for experimenting with different strategies, and to develop trading programs, EAs, and automated trading bots using virtual trading capital. A demo account offers the opportunity to develop any type of trading strategy without risking precious trading capital. Which is, after all, the main motive for professional traders and leading fund managers in the FX market.
Disadvantages and Risks of a Forex Trading Demo Account
Although FX demos do have distinct characteristics that may help traders improve their trading performance, demo accounts are certainly not free of any issues. We have listed some of the main drawbacks of trading Forex through a practice account:
- Trading psychology – Forex practice accounts deal in virtual money, which doesn’t invoke any emotional responses in a trader. Profits and losses carry no sentimental value, and a trader doesn’t care whether they win or lose money through a demo trading account. Therefore, a demo account is incapable of replicating the real-life emotions of a live trading account.
- Differences in trading conditions – Forex demo accounts are mainly known for their differences in trading conditions, such as spreads, commissions, pricing, and market entry. Demo accounts offer seamless trading, where all types of traders of any magnitude are readily accepted by the market. However, in a real live account, several factors such as volatility, liquidity, economic events, and other factors contribute to the trading experience. Therefore, it is impossible for traders to enjoy the same conditions offered by a real account through a demo account.
- Real-life results versus demo results – A trader may be successful in a demo trading environment, but they might find it difficult to duplicate the same or even a fraction of the performance under live trading conditions. Hence, there can be significant differences in trading results between a demo and a real trading account.
The Psychological and Emotional Impacts of Demo Trading on a Trader
It is impossible for a beginner to turn a profit as soon as they enter the market unless they have the right guidance and attitude to the markets. Of course, there have been cases where amateur traders have made quite a lot of money in the markets without any prior experience, but such an occurrence is quite rare. Even if traders start earning money right off the bat, it may be short-lived, as their luck may run out sooner, rather than later.
The same may be the case with demo accounts, as a trader can enjoy consistently successful results in their demo accounts. However, this may have an emotionally negative impact on the trader’s psychology, as it may instill a false sense of confidence in the trader. As a result, if a trader carries a sense of arrogance into his live trading account, the chances are that the market will discipline him within no time. Hence, it is vital for a trader to understand his trading psychology, his mental strength, and his capacity to read the markets before switching from a demo FX account to a live trading account.
Why Do Forex Trading Brokers Limit the Use of Free FX Demo Accounts?
Forex brokers are known to limit the validity of their free Forex demo accounts to a specific period, which can be as little as 7 days but is more likely to be an average of 30 days. Although there are unlimited Forex demo accounts offered by several brokers, some companies may choose to limit the free FX demo period to a maximum of 60 days. The reason for doing this is to save resources and to entice traders into opening a real account. A Forex broker’s sole revenue comes in the form of spreads and commissions, which is why it is beneficial from broker’s point of view to force traders to open a live trading account with real money deposits. Therefore, don’t be surprised if a broker pesters you to open a live trading account. But you should only trade on a live account if you are comfortable with your demo trading performance. If possible try to choose an FX broker that offers an unlimited access free Forex demo account.
Is It Possible to Trade Live Without Spending Time on a Forex Demo Trading Platform?
Most market experts and professional traders recommend trading using a demo before investing in a live account. We also prefer our readers to trade using a demo before opting for a real money account. However, it may be beneficial for your trading psychology if you are willing to open a small live trading account in place of a demo account, which should help in expediting the learning curve. A real trading account will have all the emotional factors related to trading, and it’s possible for traders to learn the fundamentals of the market rather quickly. Therefore, you can start trading using a live trading account, but don’t get too emotionally carried away by the profits and losses. To prevent any rash trading decisions, trading with a demo account is most definitely the best choice.
Making the Successful Transition from a Demo Forex Platform to a Live Forex Trading Account
Most traders falter when the time comes to switch to a live trading account. Experts recommend a minimum of 3 months’ worth of successful demo trading before moving into a real money account, but the time may vary for different traders. Traders have been known to spend even 6 to 12 months on a demo trading account before finally making the transition. Although you may feel ready for the markets, take it slow, and start trading in small amounts with trading capital you can afford to lose. Never over leverage your account, and always ensure you follow all the money management principles and trading strategies you will have developed through your demo trading. It’s easy to become emotionally involved, but it’s imperative to remove the emotion from trading and adopt the same attitude that helped you find success in your demo trading environment.
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