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What is the most essential thing to learn before venturing into forex trading? The basic principles of forex trading and trading techniques are the correct answer! But there is something that is equally important as the above-listed things but is often forgotten even by expert market mentors in their courses and webinars. The thing most forgets is that a trader should know how to use the features of a forex trading platform before getting into trading!
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What is a Forex Demo Account: Introduction
Say you have learned all the fundamentals of trading. The next step should be to open a trading account and start trading right away! Right? Not! If you have lots of surplus money that you can afford to lose then you can directly get into real trading. But if not, the wise thing to do is to open and trade with virtual money instead of real money. A Forex demo account is the best way to practise the techniques you learned in theory and learn how effectively you manage to conduct profitable transactions in simulated environments. But first, we have to learn What is a Forex Demo Account.
What is a Forex Demo Account?
1: What is a stock?
A demo trading account can be defined as a trial trading account provided by your forex broker where you will practise trading. It is especially meant for newcomers to the field of trading. It simulates real-time trading experience and environment without the risk of losing money. The demo account is used as a trading platform where you can test yourself, and have a better understanding of your strengths, skills and weaknesses. It is also the platform where you should test the newly formed strategies to test out if they might be effective in a real-time environment.
There is no risk or reward involved while trading with the Forex demo account. You trade with virtual money. You cannot gain any money you make in these transactions and also never lose any money if you suffer losses in these transactions. Trading in the Forex demo account also is devoid of any psychological implications that might come with trading in real-time accounts and being vulnerable to market risks.
So, in essence, a forex trading account helps a newbie learn the basics of forex trading and the features of a forex trading account. It helps you test the practicality of the trading strategies formulated by you. It also helps you not lose the valuable capital that was accumulated by you to invest in trading due to making silly beginner mistakes.
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What are the Pros and Cons of a Forex Demo Account?
There are some pros and cons to using a Forex demo account. some of them are listed below in the table.
| No. | Pros | Cons |
| 1 | Traders can practice their trading methods with forex demo accounts without having to risk real money. This allows traders to test their ideas in a risk-free setting and make any necessary adjustments. | Since there is no real money involved, traders using forex demo accounts might not take their trading seriously because they are using virtual funds. |
| 2 | Traders can become acquainted with the trading platform, its order types, charting tools, and other features, by using forex demo accounts. | Traders may not feel all of the emotions that come with trading, such as fear, greed, and excitement, because there is no actual money involved. |
| 3 | Traders can test out new strategies and ideas with Forex demo accounts without having to risk real money. This can assist traders in finding new trading tactics that suit their needs. | Forex demo accounts are often provided for a set period, after which traders must register for a real account to go on trading. |
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Know moreWhat is a Real Account or a Live Account?
You cannot access a demo account for a long time. You have to switch to the real account i.e. live account after the time allotted by your forex broker. A live account is a platform where you trade with real money in real market conditions. Profit and loss are real in the world of live trading. It is not risk-free like demo trading. Here you gain the money you profit from transactions. And if you make mistakes and face losses in transactions you will lose money. Demo trading and live trading are as different as playing cricket on the road with your friends and playing and professional-level game.
What are the Pros and Cons of a Real or Live Account?
There are some pros and cons to trading in real accounts too. Some of them are listed below.
| No. | Pros | Cons |
| 1 | Trading with real money is possible with forex real accounts, allowing traders to experience actual gains and losses. This may encourage dealers to trade more carefully. | Since real money is involved in forex real accounts, traders who make poor trade decisions risk losing money. Effective risk management is crucial for traders, and they should make use of risk management instruments like stop-loss orders. |
| 2 | Traders may feel the normal range of emotions associated with trading, including fear, greed, and excitement because real money is at stake. This can assist traders in gaining the self-control and self-discipline necessary to succeed in the FX market. | The fact that actual money is at stake may put traders under psychological strain, which could cause them to make rash trading judgments. Traders must cultivate the self-control and self-discipline required for success in the FX market. |
| 3 | Real Forex accounts give traders access to a range of marketplaces, which can improve risk management and portfolio diversification. | Trading expenses including commissions, spreads, and overnight fees are associated with actual Forex accounts. Traders must understand these expenses and account for them in their trading plan. |
Keep in Mind
Most traders offer you demo trading accounts and live trading accounts. They will verify your background and identity and validate you before this. they might ask for your identity proof, address and other essential documents needed for this. Some brokers don’t do this. but it is always better to choose the broker who validates such information. Always make sure that the broker you choose is regulated before opening an account with them.
Difference between a Forex Demo Account and A Real Account
Anyone can see that trading in a demo account and a live account is very different. But what are these differences? Let us look into some of the differences between trading in a forex demo account and a real account!
Trading Psychology
The trading psychology is very different when you are trading in the demo account vs when trading in a live account. Making the right decisions at the right time is very essential to be successful in trading. and to make wise decisions you should have the ability to think objectively and logically despite the situations you are in. People tend to make bad decisions when they are put in stressful situations. And trading market is highly volatile and stress-inducing.
So, when you are trading with a Forex demo account, you are trading with virtual money. There are no actual risks involved. You have no profits or losses. But live account trades with real money. Fear and greed are two things that could make you pay a heavy price in this scenario. Stress from previous or future losses and greed to earn more money make you make rash and unthoughtful decisions.
The key to reducing this difference is to trade as if you are trading in a live account already when you are in the demo account. This will train you to handle pressure better and form better risk management strategies.
Speed of Execution
The orders made in a demo account are almost executed instantaneously. It is just a simulation that is automated to mirror the real-life scenarios. But this is not perfect. They don’t recreate the uncertainty that revolves around real-life variables. They don’t have to overcome problems such as counterparties, volume differentials, broker liquidity etc. When in the case of real trading, you are competing with numerous traders to gain profits. This competition is not mild. So, in real-life situations, the execution speed is heavily dependent upon your forex broker operations and market conditions.
Also Read: 25 Best Forex Trading Demo Accounts in 2024
Trading Strategies
When it comes to trading strategies, just like situations in science, a theory or a technique is often formulated with a particular situation in mind. The said technique works the best in that ideal situation. This is often the case with demo accounts. But real-life situations come often as varying combinations of several ideal situations. And each variable will be in different intensity. So, you will fail if you are not very good at adapting the strategy according to changing market conditions.
The Forex demo account is a trial ground where you can test out a variety of trading strategies you read in books or were taught by your mentors. You can also alter them in such a way that suits your trading style and objectives. If you try to do the same in a live account, your capital will be wiped out in a few days. So, test various strategies in a demo account and learn their results in various market conditions. Also, learn how to adapt your plans before going into live trading.
Slippage
It is very easy to execute orders when you are trading in a Forex demo account. In this case, you enter and exit the trade at the exact point when you click the button. The broker has nothing to lose here. But when it comes to live accounts where real money is used, slippage is a very common occurrence. Sometimes you will get different entry and exit prices than the one you see when entering a market order or a stop or limit order you have prefixed in a specific price before all the dealings. The reason for this is that the broker has to deal with liquidity issues and a third party to fill the trade order you gave them.
Number of Trades per Day
In the case of a demo account, you can trade as many pips as you want to. If you use different EMAs, you can even cross 100 pips a day. But overtrading is not that easy while you are trading in a real account. Here you have to think about capital leverage and other such variables. As per the internet resources, even the most experienced day trader would not open more than five trades a month.
Hidden Fees
The price structures given by brokers for their demo accounts and live accounts are widely different. The hidden fees in the case of a real account include the following:
- Deposit
- Withdrawal
- Overnight fees
- Rollover
- Margin fees
None of these fees are applied realistically in the case of a demo account. Another thing to keep in mind is that all profit in the case of a demo account is gross. In addition to taxation, you won’t have to worry about currency exchange or withdrawal fees between the funds you deposit into your account and the base currency you use for your actual account.
Trader’s Performance
We have discussed in the above paragraphs that the strategy, number of trades and psychology vary very widely in the case of demo accounts and live accounts. If all these basic factors are different then obviously the performance shown by the traders in these two cases will too be different. The profit ratio will always be higher when using the demo account. The reason for this is that here you can overtrade as well as set a high risk-to-reward ratio.
But real money trading is bound to limited profit. Here your profit depends on your skills, risk mitigation strategies, and invested capital,
Position Size
Many traders are not that strict with the usual position size while they are trading in their demo accounts. They tend to make trades with sizes that will not be possible while trading in a live account.
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Targets Set by Traders
In the case of a demo account, the traders usually don’t set a fixed profit target. Even when they know that trading in a demo account should be done in the same way you do the real trading as it is training, they are more carefree as there is no risk. So, there is no need to set targets for when to stop trade. Live account trading requires proper target setting. You should have a proper idea of when to enter and when to quit a trade. They have to set a very particular average profit target.
Requote Price
The difference that comes in requote price is one of the notable differences between trading in a demo account and a real account. A trader trading in a demo account doesn’t need to requote the prices. This is because the demo account doesn’t have access to the interbank. But in the case of real accounts, requoting is quite frequent. The reason for requoting prices is that the bank is moving too fast and you and your broker are unable to execute the order at a particular price.
Spread
The spread a broker has in their demo account is different from that of their real account. In the case of demo accounts’ spreads and price feed mechanisms. Demo accounts usually have static spreads. In the case of live accounts, the spreads may widen with particular periods of liquidity and volatility. Some traders try to make more profits by conducting malpractices such as spread manipulation.
Liquidity Level
While trading in a demo account it is very difficult to understand the market impact. If you need to have a clear understanding of the price movements that are going to happen, then you need to know about current market situations. Things like news and other types of announcements can have a significant impact on market conditions. These events have a serious impact on liquidity in the market.
A trader who is trading in the demo account will not know the deciding factors behind the liquidity there. But while using a live account it is essential to stay updated on current news and world events.
Stop Loss Order Execution
In a demo account, a trader can set a stop loss order and execute it at the exact point. But while using a live account your broker may try to delay the execution of the stop loss order you set through slippage. They reduce the speed of the server to execute the stop loss order at a much lower point than the one prefixed by you. This is because sometimes your broker wants you to lose your balance.
Broker’s Error in Execution
Anyone with basic knowledge of trading has some understanding of how brokers manipulate prices. They are known to create artificial spikes and slippages in the market. They manipulate the price feed in such a way that will bring losses to you. You will not see this hidden trick of brokers while using the demo account. but in a live account if you are not aware and cautious of the manipulations done by brokers, then you will lose money.
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Things to Keep in Mind While Trading in Demo Account
Trading using a demo account is a crucial step towards completing the learning phase of trading and slowly stepping into the practical aspects of forex trading. But keep these things in mind while you are beginning to trade in a demo account.
Finish the Learning Phase First
It is in the best interests of a novice trader if they first finish learning the basics of forex trading before thinking about what a forex demo account is and how to use it. But how do we find authentic sources to learn forex trading? there is no need to go in search of such a course. Entri app provides one of the best of the forex trading online courses that provide you with all the tools you need to learn. These include live mentorship, exclusive live sessions, daily market analysis and practical trading support.
Each Platform is Different
Numerous brokers provide a variety of platforms. Both MetaTrader 4 and 5, commonly referred to as MT4 and MT5, are well-liked. Moreover, the majority of brokers offer other platforms. However, the broker may have unique rights to these extra options. This implies that other brokers might not have access to the platform.
Although the appearance and functionality of each platform may vary slightly, most offer almost the same characteristics. Forex quotes and rates, charts, news feeds, technical analysis tools, trade history, drawing tools, and the ability to purchase and sell currencies are some of these features.
Platforms vary in the number of features they offer. Some of them, for instance, have integrated tools for fundamental analysis. That may be significant to a long-term investor, but it has no bearing on a short-term trader.
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When Placing Orders
Before trading with real money, make at least 50 demo transactions on a platform to learn the intricacies of order entry. Until a trader can confidently respond to each of the following questions, they should never trade live:
- How are limit orders placed?
- How is a stop order set up?
- Can I specify a limit and a stop at the moment of entry?
- Are the platform’s spreads flexible or fixed? What’s the usual spread, by the way?
- How many units (100, 1,000, 10,000, or 100,000) can I trade in a lot size?
- Can I change up the lot sizes in any way?
- If my main Internet connection fails, is there any means for me to trade?
While some platforms let you trade by clicking prices directly on a chart, others employ pop-up order windows. Generally, to purchase a currency pair, you can click on the offer (or ask) portion of the quote. In most cases, you click on the bid portion when you want to sell. After the quote window appears, you can select a market order or limit order on certain platforms. Others, on the other hand, require you to choose in advance.
Most forex traders believe that understanding how to set up a stop-loss order on a platform is essential. When exchange rates unexpectedly go against them, that is the most reliable method for traders using a lot of leverage to avoid suffering significant losses.
Thinking About the Taxes
Tax reporting is one feature that most inexperienced forex traders ignore. Due to the global nature of the forex industry, dealers typically do not submit any paperwork to the tax authorities in the trader’s home country. The trader bears exclusive responsibility for filing taxes. The trader must then put together their tax reports using the comprehensive transaction history that brokers provide. A trading platform with well-organized and adaptable reporting features is necessary for such a setup.
Nonetheless, there are significant differences in reporting quality between dealers. You will receive a complete transaction report from each dealer. The final report you create for your accountant could take hours or minutes, depending on how those transactions are organized.
Thousands of trades are made by certain forex traders annually. It is really helpful to have a platform that compiles all of those trades into an understandable income statement.
The way that currency trading is taxed depends largely on the tax status of the individual. The majority of dealers won’t give you tax advice, and if they do, you shouldn’t heed it. The majority of them lack the specific knowledge necessary to interact with the various tax authorities across the globe. A tax specialist should always be consulted before making a decision.
Better platforms for taxes are often those that are easier to use and provide more structured trade history reporting. Look at the account statements and trade history after doing some demo trading. How simple would it be to view your annual gains and losses? You may also get better at trading by going over your profit and loss record.
Trade Demo Account Like You Trade Live Account
Once you are proficient with a trading platform’s fundamental features, try out different strategies on the demo platform. Are you a high-leverage, short-term momentum trader who looks to capture changes of ten to twenty points? Or would you rather keep longer-term investments that have the potential to deliver hundreds of pip gains while utilizing less leverage? You can find out what kind of trading works best for you by using demo accounts.
Although it’s not the real thing, demo trading can help you get ready for live trading. Many people remain calm despite suffering a significant loss on a demo account. However, several individuals become absolutely out of control over even a minor loss in real account. You must trade the demo account as though the money were real to maximize the profits from demo trading.
The easiest method to get started is usually to start slowly with real trading. You may start an account with just one US dollar at several forex brokers, such as OANDA. The experience gets genuine when you begin trading with even a small amount, a few hundred dollars. The next logical step after demo trading is small-scale trading.
Top 8 Forex Demo Accounts of 2024
The top demo accounts to learn forex trading in 2024 are listed below.
- eToro
- Nightcap
- IC Markets
- IG Group
- Pepperstone
- OANDA
- Plus500
- BlackBull Markets
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Know moreWhat is a Forex Demo Account: Conclusion
Opening a demo account for Forex is a great way to get started in trading. Although there are a lot of differences between a demo and an actual account, they are nevertheless a useful learning tool for new users. They don’t have to risk any actual money to begin trading. Demo accounts are extremely important and should not be overlooked. They are the most effective teaching aids for a novice trader.
Demo accounts do not offer the same emotional commitments as live trading accounts. You will, however, start the process of learning how to trade if you take it seriously, and you will gain from it. Locating trustworthy Forex brokers that provide free trial accounts is not difficult.
However, because of the differences between Forex demo and real accounts, you will not gain certain abilities unless you trade on a real, live account with your own money at risk. Starting with a demo account when you are new to Forex is like learning to ride your bicycle with training wheels. Training wheels are necessary when you first start, but even once you take them off, there is still some learning ahead of you.
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Know moreFrequently Asked Questions
Are demo accounts for Forex accurate?
No, demo accounts aren’t always accurate. Creating a demo account is mostly to practice and test your trading techniques. These are static spread accounts with no risk. It is challenging to replicate the psychology and advantages of demo account trading in a real-world setting.
Is the MetaTrader 4 demo authentic?
While the MetaTrader 4 demo accounts are authentic, there may be pricing delays. Moreover, spreads and fees on MT4 demos operate differently from those on live platforms.
Does the real money account look the same as the demo account?
No, they are not at all the same. A demo account’s price feed spread, and newsfeed market influence differs from that of a live account. Even the ask and bid prices differ in both cases.
Are the Forex demo accounts rigged?
This cannot be said of every broker’s demo account. Undoubtedly, a large number of brokers provide rigged demo accounts. Real money trading involves slippage and price feed changes. However, not all brokers do this.
