If you are looking at trading on the foreign currency exchange market then it is advised you begin with a demo account. This not only allows you to practice new skills but also educates you in the ways of forex trading. These demo accounts are excellent opportunities to test trading plans and strategies to see if they are suitable for your trading needs. It is important to note that there are risk management plans which must be attended to. If you want to be an effective trader you must implement these into your trading strategy.
The forex trading accounts
The purpose of a demo account is to teach inexperienced traders how to trade on a forex market. It does this via the use of virtual money which helps increase the new trader’s confidence. By using virtual capital one can trade without any fear of personal loss. While a demo account is a practice account one should treat it as a ‘real’ account. It is only by gaining this perspective that you will learn about the dos and don’ts of forex trading.
Once you feel you have learned enough from a demo account you should transfer your skills to the forex live market. It is important to use the same strategy, with all risk management plans, in your forex live trading. Often new traders will experience detrimental losses during this transition as they do not realise the consequence of losses. This is why it is important to see a demo account as a real account.
Looking at leverage
When opening a demo account it is recommended that you request a reduction in the amount of leverage allocated to your trading account. The majority of risk management plans allow for a maximum leverage amount of 20:1. It is a good idea for your forex broker to limit your trading account to this amount as well. This provides you with the opportunity to practice with this level of leverage and become accustomed to it. By experiencing this amount you will be prepared to manage leverage when transitioning to a live trading account.
Forex trading account balance reduction
When opening a demo account you will be offered a particular account balance. One of the greatest problems to a demo account balance is that they are often unrealistic. Many new traders do not have large funds to deposit as an initial investment so it is advised to have this balance reduced. By reducing the balance you will be simulating real world trading conditions. This allows you to practice trading in a realistic manner and makes the transition from demo to forex live trading much easier.
In order to reduce the capital amount you will have to contact the foreign currency exchange broker who offered you the demo account. It is generally very simple to arrange and can be done via email or live online chat. It is recommended that new traders set a level of approximately $5000.