What is a Forex Demo Account?
A forex demo account allows complete beginners to get familiar with the various aspects of trading without risk.
A forex demo account is also referred to as ‘Paper Trading Account’ which is used for practicing trading or to test a new trading strategy without any risk to actual money. A forex demo account also serves the purpose of enabling people who are complete beginners to forex to get familiar with the various aspects of trading.
The demo account can kickstart the process of getting familiar with the trading platform: understanding how to place orders, managing existing trade positions as well as more advanced functions such as testing or fine tuning a trading strategy.
If you are new to trading, then it is highly recommended that you first get yourself acquainted with a forex demo account until you are comfortable with both your trading strategy as well as the trading platform itself.
Benefits of a Forex Demo Account
A forex demo account is actually a ‘must have’ regardless of one’s trading experience. Even the elite hedge funds and prop trading institutions always have a paper trading or a demo trading account handy for traders to keep practicing and honing their trading skills.
The benefits of maintaining a forex demo account is therefore not just to assist beginners but is a good practice in the long run. Here are some key advantages of having a forex demo account.
- Practice trading: The most obvious of all, a forex demo account is primarily used to practice trading and to get familiar with the trading conditions. Most forex brokers offer a similar data feed in a demo account to a live account, meaning that even though you are trading in a demo environment, the market conditions mirror the live markets. This ensures that practicing traders get to test their prowess in a safe and risk-free environment
- Test your trading strategies: A forex demo account is the first place to start when you come across or develop a trading strategy. It is recommended to test your trading strategy on a demo account in order to see how well your strategy is likely to perform. A forex demo account with its risk free trading environment therefore allows traders to test and tweak their trading strategies without the risk of having to put up real trading funds
- Risk management: A forex demo account is also helpful for traders to manage their risk. Factors such as how many positions to open, or how many units or lot sizes to trade can be cumbersome initially. But when practiced on a demo trading account, traders can get to a point where risk management in terms of position sizing can become second nature and thus makes moving to a live trading environment a lot easier.
How to get the most out of your Forex demo account
Instead of randomly creating a trading account, follow these tips below to derive the most out of your demo trading account.
- Demo Funds: Make sure that the demo funds you use closely mirrors what your actual trading equity will be. For example, if you are planning to starting trade with $500 in real money, then it makes no sense to open a demo account with $3000 in virtual funds. It is always best to keep your demo trading account as close to the real account as possible
- Leverage: Select the leverage, which should be the same leverage that you are likely to use with your real trading account. It goes without saying that always open a demo account with the same broker that you plan to trade with real funds. This ensures that the trading conditions such as spreads/swaps and order levels will be the same across demo and live trading accounts
- Stick to a trading strategy: A trading strategy is only as good as how familiar you are with it. Add in money management and some experience on how you expect the strategy to work and you could be looking at making consistent profits. Once you select a trading strategy, make sure to trade with it for at least 60 days, regardless of how good or bad your demo equity rises or falls to. Discarding a trading strategy merely because you hit a string of losses will only land you back at square one. So keep going at it and then review your trading strategy’s performance on the demo account after 60 days.
- Treat your demo account as if it were real: Emotions play a big role in the financial markets and there is an element of risk involved when it comes to trading with a real trading account. With a demo account, traders end up taking more risks. With some practice, you can quickly learn to treat your demo account as if it were real which will help you build the same mindset as if you were trading on a real account.
What is the ideal trading platform for a Forex demo account?
The MetaTrader 4 (MT4) trading platform is one of the most popular and widely used trading platforms when it comes to retail forex trading.
It is supported by a vast majority of developers thus ensuring that even the most custom of trading indicators can be easily found or coded without having to spend a lot on coding indicators for lesser used/known trading platforms.
Transitioning from a Forex demo account to live account
Once you have spent enough time practicing on a demo trading account, and you have gained familiarity with a trading system, as outlined earlier in this article, open a live trading account and ensure that the trading conditions are the same.
This includes the starting balance and leverage, assuming that you will open a live account with the same broker that you used for a demo trading account.
For the first few trades, ensure that you trade the most minimal of positions until you grow confident and familiar with the live trading environment before you can start scaling up on the positions.