This article looks at the different uses of a forex demo account, including the testing of forex strategies.
The foreign exchange trading market has been noted as one of the most beneficial trading markets worldwide. Due to the online format, extended trading hours and decentralised network, it has grown enormously in recent years. In addition to all these features, new and experienced traders will admit that one of the greatest services is the forex demo account.
What is a forex demo account?
A demo account is a trading account where one can practice forex strategies and skills. It allows a trader to develop and master a trading plan and strategy before entering the forex live market. They are recommended to new traders in order to gain trading experience without the fear of detrimental losses.
A demo account involves allows a trader to execute trades on the forex live market. It simulates a real environment, however presents with some differences keeping the trader safe. These alterations include virtual trading capital and instantaneous trade execution. By not having to worry about personal loss, the trader is able to build confidence in trading skills and enter the market with high self-belief.
The forex demo account is available via forex brokers.
Trading without risk
As is mentioned above, the forex trading demo account allows new traders to learn how to trade forex without the risk of personal loss. This is due to all money used being virtual and the losses being non-consequential. This behaviour can be beneficial in that it allows one to make and learn from your mistakes; however, it can also make the transition from demo to live account difficult. Many new traders have incurred detrimental losses when moving from the demo to live account because they could not adjust to trading with real money. Instead, they would continue executing risky trades without consideration of the personal consequences.
Learning risk management
While trading on a demo account does allow for risky trades to be made, the trader must learn risk management when developing a trading strategy. Risk management involves the setting of risk prevention techniques such as stop loss orders. Another method is to not trade more than 2% of your trading capital. Some traders will adjust their demo account trading capital to simulate a live trading capital. This allows for a more realistic trading environment and a greater need for risk management.
Testing a trading platform
Many individuals believe that demo accounts are used by new traders exclusively; however, this is not so. It is recommended that all traders, new and experienced, utilise a demo account when changing forex brokers. This allows one to test the broker’s trading platform and determine whether or not it is suited to your forex trading style. It is important to have a trading platform that you are comfortable using or risk experiencing losses.
Testing forex strategies
New traders are advised to use a demo account when developing their trading plan and strategies. This gives them a change to test not only hone trading skills, but develop and master the trading system before entering the forex live market. Experienced traders should also use a demo account when considering a new forex strategy. This will ensure that the strategy is foolproof when they trade with it on the forex live market.