A Beginner's Guide to Forex Demo Accounts



For anyone new to Forex trading, the learning curve can be pretty steep. There's just so much to learn and getting to grips with unfamiliar terms, trying to master new software and at the same time trying to make a profit while still learning the ropes can be a pretty tall order.

Possibly the single most helpful thing you can do to stop yourself getting overwhelmed is to sign up for a forex demo account before trying to tackle live trading. Demo accounts provide an excellent opportunity to learn the ropes of forex trading without risking actual real money. This immediately takes the pressure off the novice trader and allows you to focus on what you should really be doing - experimenting with different strategies and developing a comfortable and effective trading mentality.

Forex Demo Accounts are available from many different online trading platform providers, and they are free to use. Simply stated they are an invaluable tool when it comes to learning Forex trading. While there's no substitute for trading live, a practice account is the next best thing and gives you a very real taste of the live forex trading experience but without the associated risk. All the controls, interfaces and options are the same as a live trading platform, all the indicators and real time fluctuations you'd experience normally occur just the same as well - this isn't a sheltered environment! The only real difference between a demo account and a live account is the fact that your gains (and losses) are ultimately imaginary.

I am very familiar with the negatives associated with demo account trading, as I experienced them early on when learning to adjust from stock/option trading to Forex trading.

1. Demo accounts give a false sense of security in Forex trading.

2. The emotions of "Live Money" trading are not brought into play with demo accounts.

3. Forex demo account quote feeds are not the same as live account feeds.

There are some truths to these. Demo accounts do give newcomers a false sense of security in their abilities, since the emotional involvement with a pretend trade is nowhere near the emotional roller coaster associated with a live trade with ones own hard earned money. And I do disclose this fact to all aspiring Forex traders prior to them going live.

As far as the price feeds being different on demo accounts, this just isn't true with the demo accounts we utilize. The exact same currency quote stream that feeds my demo also feeds my live accounts. They are both coming from the exact same ip address. I have heard of this problem on other demo accounts, but have no first hand experience with them.

What is different is the market reaction to my demo trades (which is no market reaction) versus my live trades. On a live trade, the very next tic after I execute a trade is in the opposite direction 99.9% of the time (I will explain why in a future article). Another important difference is that the demo is where the brokers test any platform updates or changes prior to being implemented on their live platform. This may cause some instability on the demos which are not seen on the actual live platforms.

The benefits to utilizing a Forex demo account however, far outweigh any of these drawbacks. The two most important reasons are learning how to use the trading platform itself, and becoming familiar the Forex market. There is no worse feeling than to jump on a trading platform, figure out how to execute a trade, make the trade, realize you made it in the wrong direction, and then spend the next fifteen minutes reading through the online instructions trying to figure out how to close the trade, all the while the market is on a surge against you. Please, practice doing everything on the demo platform you intend to use before going live.

Secondly, and this cannot be stressed enough, no other market in the world is as exciting (hence volatile) as the Forex market. You can read, train and study all you want. Until you develop a feel for the Forex market and learn what we call "reading the right side of the charts," your trades will have higher probabilities of ending up in losses. And I will let you in on a little Forex secret.

There are no secrets in Forex. There's not a secret trading strategy that will work for you all the time. Every strategy ever thought up, designed and marketed has also been bought, analyzed and countered by other traders and brokers (us included). You must develop a feel for the market, and there is no cheaper way of gaining market experience than with a free Forex demo account.

Many other benefits also come from the use of Forex demo accounts. For example; FXCM offers trading accounts with three different platforms, one for micro accounts ($50 initial minimum and trade 1K lots), one for mini accounts ($200 initial and 200 to 1 leverage) and one for standard accounts ($250 and 400 to 1 leverage). We only offer one demo account though, and it is with our standard account platform. Why? It is the best, most sophisticated platform with the best charting package.

Even if you sign up for a micro account and live trade on that platform, we recommend using the demo account for all your practicing, analyzing, set ups and charting. Making mistakes and taking losses on the 400 to 1 leveraged demo platform, even with pretend money, will teach you quickly to practice sound risk management strategies on every trade. It makes transitioning from the smaller account platforms to the standard account seemingly effortless.

I leave my demo account charts running for audible alerts when we hit stops, profit targets, technical price levels and when certain technical indicators form. I also keep the Automatic Trading Systems that we utilize running on the demo. I seldom allow computers to automatically execute trades unattended with real money (although they can). I let them execute the trades automatically on the demo accounts with pretend money and audibly alert us. I then check and see if we should also execute a matching live trade.

The audio alerts also eliminate the need to be sitting in front of the computer all day while a live trade is open, or while just waiting for the markets to do something that would require my attention. The alerts have also awoken me from a sound nap (it is a 24/5 market).

Another great reason for Forex demo accounts is testing. You can test everything out. Including platforms, techniques, signals, strategies, counter strategies, trading systems and counter trading systems. You can also back test everything. In fact I back test a lot, both long and short time frames on every imaginable indicator, strategy and currency pair.

Even my veteran trading friends continuously test and back test the 150+ indicators available on the demo platform. With a market that changes as quickly and as often as the Forex market does, this is a necessity to remain profitable. The only thing easy about Forex trading is executing the trade. That just requires a click of the mouse. There is quite a bit of work before and after that click.

And the final reason I always keep the demo account running. I never - ever chart out my trading strategy on the same platform as the one where I execute the trade. And there is a very good reason for this. I do not want the broker of my live trading platform to see what I am planning on doing.

Ok. I know. It's silly and superstitious. I know there absolutely no way my broker can see what I am plotting out on the chart on his platform. I also realize that even it was technically possible; the breach of ethics and legal issues would prevent these honest business professionals from ever using such a thing. But I do not place future orders on the live platform. I will explain why in another article.

I am certain of one thing though. That wearing this tin foil hat on my head does prevent my trading thoughts from transmitting through the internet lines for all to see.

As always - Good Trading to You.