The Advantages of a Demo Account
Foreign exchange trading is the largest financial market in the world, with more than US $5 trillion changing hands in daily trading volume. One of the reasons for its popularity is its decentralised nature – there are no centralised marketplaces likes the Stock Exchanges in New York, London, or Tokyo, for example. Instead, trading is conducted on an international basis through electronic networks, the internet and the phone by banks, financial institutions and individual traders. This also means that forex can be traded 24 hours a day, five days a week.
However, whilst it is easy to trade forex, with few barriers to entry, it is also very easy to lose money in this market, especially if you are a novice or just starting out. 81% of all trades on the forex market lose money, it is estimated. That is why it is essential that anybody who wants to pursue Forex Trading as a long-term career takes the time to learn the intricacies and complexities of the market before they begin to trade in earnest. And the best way to learn without risking any initial capital is to open a demo account.
In order to begin trading in the Forex market, the first thing that a retail trader needs to do is open a margin account with a licenced broker. This account enables them to buy currencies with borrowed funds, in exchange for the deposit of cash or assets as collateral (the concept of leverage).
They will also need to obtain access to a trading platform like MetaTrader 4 (MT4) – or its less popular successor MetaTrader 5 – to enable them to trade in the market. These software platforms are licensed to Forex brokers who provide it to their retail clients, enabling to them to manage their accounts, place orders, and view live streaming prices and charts, as well as various statistical analyses.
There are a number of software providers that allow new entrants to online trading to open a free demo account either for their own proprietary product or for the industry standard MT4. They can also be used with mobile apps so people can learn how to trade with their tablet or smartphone.
What is a Demo Account?
A demo account enables newcomers to learn the complexities of foreign exchange trading in a risk-free environment. It replicates all the functionality of a live account with one key difference – the user is trading with virtual money rather than the real thing! Not only does the user get the chance to learn about how the market works, and the key concepts and strategies, they also get hands-on experience of the MT$ trading platform.
Trades can be executed in real time, and users can learn how to analyse the market and currency movements without having to risk any of their own money.
The Advantages of a Demo Account
The principal advantage of a demo account is that you get actual practice in a live market experience, and can learn and test various forex trading strategies without suffering any financial consequences if you make a mistake, or read the market wrongly. You also get the chance to familiarise yourself with how the MetaTrader 4 software platform works, and you can access a wealth of information such as market charts, forex news, trading signals, and other critical market data.
A demo account is also much more forgiving than the real world as well. It is by no means uncommon for novices to press the wrong button when opening and exiting a position, which means that rather than closing out a losing position, they are actually adding to it. And by making errors when inputting an order, they can soon find themselves on the losing side of a large, unprotected trade. In the stressful atmosphere of the live market, inexperienced hands can too often panic and make mistakes, especially if they have no prior trading experience.
Using the demo account, you can learn how and when to enter and exit the market, and to get a feel for how quickly forex markets move. You can also learn the key concept of targets – in essence, the amount that you are prepared to spend, and, by extension, how much you are prepared to lose on a trade in the event that the market moves against you.
Once some of these basics have been mastered, then some of the greater intricacies of forex trading can also be absorbed, such a show to use limit and stop-loss orders.
Opening a Demo Account
Opening a Demo Account is simple. There are numerous brokers and software providers that offer demo accounts free, often for an initial period of 30 days. Usually, prospective traders need to provide basic information on sign-up, such as name, phone, email address and country. They will then be sent a username and password to begin accessing the system.
Demo accounts can be downloaded for any platform – Windows, Android, and iPhone/iPad.
There is no prescribed amount of how many trades it takes to learn forex trading, or enough about it to feel comfortable enough to start trading in a live environment. Some would argue that it takes a minimum of between 50 and 75 trades to master the basics, whilst others stipulate that it takes more than that.
However, prospective trades should feel that they should understand, at least, some of the following concepts:
• The eight major trading currencies that make up the majority of trades in the Forex market
• The difference between yield and return
• The importance of leverage, and how to control your risk exposure
• What lot sizes can be traded on forex markets and can these sizes be mixed and matched?
• How to place a stop loss or limit order; and
• What is a typical spread, and how do spreads vary over time?
Other Learning Resources
A demo account is not the only way to learn about forex trading, and should not be used in isolation. Instead there is a wealth of teaching material available online in the form of webinars, blogs, vlogs and white papers, all of which are useful in terms of being able to build up the knowledge and understanding of financial markets. The one advantage that a demo account offers over these other methods is that it offers practical, hands-on experience of live trading without the associated financial risk.