As the largest financial market in the world, the Foreign Exchange (Forex) turns over more than $5 trillion each day, an amount equal to about a month of Wall Street trading. There’s money to be made in Forex, no doubt, but new traders also tend to blow out their accounts at a high rate. It’s a complex, deregulated, fast-moving market that does not play kindly with those who don’t have the chops or experience to keep up. But that seems like a catch-22 situation. How do you gain market experience without actually risking your money in the market? Ladies and gentleman, introducing your new best friend, the demo account.
The Forex Demo Account
Most retail Forex brokers offer what is called a demo account when you sign up for their service. These practice accounts usually are good for 30 or 60 days, though some come with an unlimited time frame. For those brokers who put a time limit on it, once you fund a live account you can continue practice trading in demo mode. Visually, trading a demo account feels just like participating in the real market because that’s (almost) what you are doing. The platform looks the same, as do the included tools and indicators. Streaming price quotes you receive in demo mode are identical to the real market because that’s where they come from. The only difference in trading in demo is that you can’t lose real money. When you’re starting out, trust us, that’s a good thing. Until you’ve had a fast-moving trade turn against you with no stop-loss in place, you don’t realize how quickly you can lose it all in this highly-leveraged environment.
Why Should You Use a Demo Account?
A demo account is a way to practice your skills and test new strategies under real market conditions but using virtual (fake) money only. Like so many things in life, you should not expect to be an ace currency trader immediately upon commencing your trading career. Even if you’ve traded other markets, the Forex is different. It will take your lunch money, leave you on the sidewalk with a bloody nose, and never even say, “Sorry.”
The small percentage of traders who eventually figure out how to make a living trading in the slipstream of institutional market movers would likely tell you there are just a few things you need to learn to do really well. Perhaps surprisingly, your particular strategy doesn’t matter that much. There are dozens of well-documented approaches to trading that provide a savvy trader with the edge he or she needs to be profitable. But beyond strategy you need patience, discipline, an understanding of position sizing, and an ironclad rule to never trade without a stop-loss in place.
Demo Forex Trading Yields Real World Lessons
If you’re starting to get the idea that trading a demo account before going live in the Forex market is a good idea, bravo for you. One of the most valuable lessons demo trading provides is an opportunity to become familiar with the platform interface before placing real trades. It’s easy to sell when you mean to buy or vice versa. Likewise, until you’ve played around with the idea of measuring trades in pips for a while, you could inadvertently launch a much larger trade than your account can handle. We call this position sizing and it might be the most important thing you learn in the demo environment. As a rule of thumb, you should never risk more than 3 percent of your account on a single trade, and most experts suggest never more than 8 percent total in all open trades. How do you properly size a trade? With a stop-loss order. We’ve said it before. Never trade without one.
The Bottom Line
The get-rich-quick mentality is the undoing of many Forex traders, since it is often followed by the I-just-blew-out-my-account blues. The best way to avoid this unfortunate scenario is to make yourself use a demo account for some length of time before switching to live trading. If you don’t have the patience to put in time learning the ropes, there’s a good chance you’re doomed to failure anyway. Consider this your first lesson. Trade a demo account for a full 30 days (or more) before going live. Good luck out there.