Best Approach for Forex Demo Trading- Beginner’s Guide
All beginners who enter the forex market hear one common piece of advice: trading on a demo account first. A Forex demo account is a perfect starting point for any new trader in the currency market, and it is a wonderful opportunity for learning and practice if you use it well. But many times, the forex demo account facility is under-utilised as newbies tend to rush into live trading. Sometimes, we spend enough time on demo trading but don’t get benefits as we follow the wrong approach. We realise all this after switching to a real account later on, where we risk losing real money. So, what are the features that make a demo account useful? And what is the best approach for demo trading?
This beginner’s guide will answer all such questions to help you mark a successful beginning to your trading journey through a demo account. Read Full Article
How Do I Make Use of a Demo Account in Forex Trading?
One of the most important prerequisites of forex trading is a trading account with a broker along with a stable internet connection. When you find an ideal broker for forex trading, you will be heading to their account opening page and there you will get to see 2 options: opening a live account and opening a demo account. When you click on the demo option, you will be asked to enter basic personal information such as name, country of residence, phone number and email. After that, your Forex demo account will be activated within a few minutes.
The Forex broker will credit your demo account with virtual funds, and then you will be ready to place trades on this simulative space for free. You will be trading in real-time market conditions with all the relevant tools and features that are available on the trading platform. The functionality of the demo trading account and trading experience will be very similar to that of a real trading account, allowing you to get familiar with the new platform, trading environment and technicalities conveniently.
How Are Demo Accounts Different From Live Accounts?
A Forex demo account is an exact replica of a real trading account and imitates the real-time market conditions pretty well. However, there are some significant differences between a demo and a real account, and you need to know them before getting into demo trading. We will look at the key features of the demo and live accounts for a comprehensive comparison.
Forex Demo Accounts
- Capital and expiration time – Most brokers offer a virtual capital of $ 10,000, and sometimes you can request them to change it to suit your requirements. Another feature of demo accounts is that they have an expiration period of 1 month with most brokers, and you will have to open a new one or request renewal after this time. But demo accounts can be maintained for a long time if you open a funded live account with the same broker.
- Realistic but not real – The market conditions will be very realistic when you trade on a demo account. The method through which trades are placed and executed will also be real, but the capital being risked is not real, and that is how you eliminate the risk. However, the demo trading experience is invaluable for any beginner as it prepares them for actual trading.
- Zero Risk – As stated earlier, the very purpose of demo trading is to learn trading or try out new techniques without risking your real money. Because even an experienced trader can make costly mistakes while trying something new. Hence, demo accounts are ideal for testing a new technique or learning the basics of trading without worrying about the risk.
- Functions as an educational tool- Forex demo accounts are mostly used as a platform for learning without any risk. Beginners are always suggested to use demo accounts to gain practical knowledge as they understand the trading concepts better while also watching the market fluctuations in real-time.
- No impact on the Market – The trades we place on a demo account have nothing to do with the actual forex market, and it has no impact on the market in reality. You are just trading in a simulated environment that has no connection with the real world.
Forex Live Trading Accounts
- Depositing actual money – Live trading accounts cannot be activated for trading unless you deposit actual money as trading capital. This money will be used for trading, and you should also look into funding/withdrawal methods and processing. Different brokers have different minimum deposit requirements and it also varies depending on the type of account you choose. For instance, trading on a micro account requires less capital than trading on a standard account.
- Margin requirement – Margin requirement is the minimum amount of funds you need to open a trade position. If your account balance falls below the required margin levels, your broker won’t allow you to enter a trade and if it happens in the middle of a trade, you will be asked to deposit more funds, and the trades will be closed automatically if you don’t add funds in time. You can make use of tools like margin calculators for calculating the amount of funds needed for a trade position.
- KYC formalities – Opening a live trading account differs from opening a demo account, and you must complete the online verification and KYC formalities for account activation. The broker will ask you to provide additional documents for verifying your identity along with bank account details based on the method of payment you choose.
- Exposure to risk – On a live account, the trading conditions you get will be real, and all the trades you place will be executed for real, impacting the market. Hence, you will be exposed to the market risk, and all the profits/losses you make will be real.
- Trading cost – When you place trades on a live account, you will have to bear the cost of trading, which is the spreads, commission and rollover fee (applicable on overnight trade positions) charged by your broker.
Who Can Utilise a Demo Account Best?
Both beginners and experienced traders can use demo accounts per their needs and requirements. Beginners will be using it as a tool for learning, practising and developing their strategies, while seasoned traders utilise demo accounts for testing a new strategy or trading technique prior to live trading.
Now, I will share some tips that you can follow to improve your demo trading experience with the best approach.
- Observing the market – Demo accounts are the best place for observing the dynamic forex market and getting familiar with the market fluctuations happening in real time. Based on this, you can make many key trading decisions that pave the foundation of your trading career later on. This includes choosing the best currency pairs for trading, finding the best trading session, selecting your own trading style and outlining your strategy based on the market situation.
- Developing trading skills – All of us may not be tech-savvy to begin with, and trading in the forex market requires some basic knowledge about technology. On a demo account, you can take ample time to try different tools and become skilled enough to use them well.
- Experiment and explore – Demo accounts are there to provide a risk-free trading experience, but you also get to see the trading results in real-time market conditions. Hence, you should use it to experiment, explore various techniques, and try out different trade scenarios. That way, you can find the best methodology for live trading.
Drawbacks of Demo Trading
- Not enough emphasis on risk management – Traders are aware of the fact that they are not exposed to any real risk in demo trading, and hence, they don’t prioritise risk management, which is a crucial component of successful trading.
- Lack of emotions – Demo trading does not evoke much emotional response in traders, and hence, they won’t be able to work on emotional control, which is very much needed in actual trading where real money is at risk.
Key Takeaways
To sum it up, demo trading is a key step in learning when you are a complete beginner in the volatile forex market. Many newbies are seen skipping this step or not using it well enough as they don’t find it beneficial. But for most newbies, jumping into live trading would be dangerous when they try to learn from scratch without any prior experience and little to no knowledge. This amplifies the risk of loss and puts you in a lot of pressure. Hence, attempting demo trading with a serious approach would be the best course of action for any beginner.
