Forex Demo Account

A forex demo account is a great learning tool, and also the best source of first-hand information about forex.  Most people who just begin getting interested in currency trading spend too much time reading and not enough time trading.  So if you don’t have a demo yet and the subject interests you, don’t waste your time.  There is a multitude of links on this site to reputable brokers who will be happy to give you a free demo account.  Pick any and play with it.  In a couple of days you will know more about forex than you could ever learn by reading.  After that, a lot of things you read will begin to make sense.  But don’t fall into the demo trap.  This trap makes you learn wrong skills if you spend too much time in the demo, and you need to move on to real trading soon in order to avoid it.  The popular notion that you need to be able to win consistently in the demo before commiting real money is questionable, because real forex is a very different beast.  

The demo is only a simulation. The difference is about the same as between flying a Boeing 747 in a flight simulator and actually landing the thing. By analogy, most people that spend a lot of time playing with fake money, winning contests, and getting high virtual profits with excessively risky trades, often show less than spectacular results when they attempt to do online forex trading in a real account. 

The reason why demo is so different from the real thing is two-fold.

The first and most obvious difference is in trader psychology. A great change in behavior happens when the person is aware of risks and rewards associated with a certain action. Would you agree to make a two-week business trip to Paris? How about Baghdad? What if you get triple pay while in Baghdad and can stay at an army base? What if you get triple pay, but need to travel the country alone? The answer is different depending on the circumstances, although the action that you need to perform remains the same. Fear and greed rule the markets, and no matter what you tell yourself, you will act differently while trading with your own real money on forex. It’s a fact of life and there isn’t much you can do about it, except constantly being aware of this effect and learning to adjust to it.

The other and less well known difference between demo and real trade is in order execution. 

Demo forex accounts are always handled by a computer. A human dealer is most likely involved in execution of your trades in a real account if your trade is bigger than the minimum, market volatility is high, or your account is flagged for some type of undesirable activity. As a result, your trade can take several minutes to execute, while it is practically instant in a demo account. Unfortunately, the faster the market is moving, the longer is the delay. Especially if you use market orders, the price at which you finally get filled can be very bad.

If that weren’t enough, forex simulation on a demo account does not model the filling process. The demo simply takes the price feed, usually from Reuters, and “executes” your order on the basis of the last available price. When you are trading forex live, especially during high volatility, you will probably experience problems with filling. The dealer may inform you that there is no current price, or when you finally get a quote, it may be way off from what you see in the feed.  Stop orders don’t work quite as well, too.

Altogether, demo forex is too forgiving. Your judgement is way better than normal because of the lack of stress. You don’t second-guess your decisions in the demo, and it’s a lot easier to cut virtual losses than to cut the real ones. Order delays and bad fills don’t happen. Stops don’t slip.  Because of this, many of the skills that you learn in the demo work to your disadvantage. Of course a strategy that loses in the demo is guaranteed to fail in the real market as well, so this type of testing helps, but it doesn’t work the other way around. Success of a strategy in the demo may or may not be indicative of its real performance. This is why the best course of action is to spend just enough time in the demo to learn the software and market basics, and move on to the world of real trading as soon as possible. 

If you don’t have a demo – open one now.  Poke forex with a stick and see what happens.  Again, any of the brokers presented here will be happy to accomodate you and answer all your questions.  Don’t dwell on it, the time to pick the broker that is right for you will come later.  Use your demo to learn the functions of the terminal, learn to make trades without silly mistakes such as buying when you wanted to sell, and, most importantly, learn how to use stops.  Get a feeling for it. Once you know what you should expect to see in your account when the market moves, decide whether  you want to pursue currency trading and accept the associated risks.  If you do, read up a bit, it will make a lot more sense with demo trading experience, I assure you, and start to learn the right skills with small, but real money.

Everyone who is making a living on forex now, started with a demo account and learned through practice.  Think about it and act today.  Find a broker that appears most friendly on this site and open a demo.  It is free and there are no obligations – what have you got to lose? 

Happy Trading!

In the current market situation, conventional long-term investment in stocks, bonds, and mutual funds can no longer comprise 100% of one’s portfolio — simply because it can no longer provide the desired safety of capital. The world’s markets have become so interdependent that all asset classes are now very correlated. This means that they rise and fall together, fully exposing the investor to global risks. Diversification of one’s holdings is more important now than ever, and equally hard to achieve. Here is where forex trading online comes into play.

The way to achieve true diversification is to include currency investments and active trading strategies into one’s portfolio. Currency investment takes many forms, from the very conservative buy-and-hold of government bonds nominated in foreign currencies to short-term speculation on forex. Currencies rise and fall out of sync with stock markets. For example, while the Dow has lost 34% in 2008 (Jan 01 to Dec 31), the Japanese Yen gained 23% in the same time period. Of course, the opposite may happen as well. It is important to note that currency exchange rates are affected by different factors than stocks. A stock has a natural tendency to follow the company’s earnings. If the company grows its business, the stock price follows. Currency value does not depend on the health of a country’s economy as much as on the actions of the issuing central bank and inflation. Consequently, the main difference between stocks and currencies is that stocks in general can be expected to grow long-term, while currencies change fast in respect to each other, following the general direction to lower purchasing power because of global inflation.

Because of this, holding currencies for extended periods of time is more risky than implementing a short term active forex trading strategy. Gains and losses realized in currency trading do not necessarily depend on the direction of the market, but are determined by the strategy itself. For example, a strategy built to trade short in bear market rallies can perform exceptionally well in the current environment with the dollar — but more importantly, it will add a negatively correlated component to the portfolio. Brokers provide a number of ways to implement an active trading strategy, including highly automated online forex trading terminals that have the ability to automatically analyze the market and place orders.

While investing in currencies is necessary for asset diversification and provides many benefits, including protection from loss of the purchasing power of the dollar, it is also not something that should be undertaken lightly. Investing in currencies is not similar to the more conventional forms of investment, and requires a skill set that most retail investors don’t have. This is precisely the reason why investment in currency is not recommended to clients by mainstream financial advisors – they consider it best to be safe than sorry and, frankly, this advice is the best one for many people whose itch to get rich fast overcomes their ability to reason.

However, when used as a diversification and hedging tool rather than a high risk speculative instrument, forex trading has a legitimate place in a portfolio. It is easy to get a first hand impression — any broker will be happy to offer a free forex demo for practice, without any obligations.