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A Forex demo account is a trading account opened with a Forex broker with virtual money. A Forex demo account has all the elements of a real Forex account, except for the source of funds in the account – otherwise known as the capital. A real account has money sent by the trader to the broker, who then credits the account with the funds. But a demo account contains virtual money provided by the broker. Such funds can only be used for practice trades and cannot be converted into real funds.
Why Use a Demo Account?
Trading with real money can be a risky venture. All CFD brokers who are licensed by good regulators, such as CySEC in Cyprus, must clearly label their website and advertisements with a risk warning detailing what percentage of traders lose money on their platforms.
So, it is clear you can either win or lose. Winning and losing in Forex is a result of how well you know the market, your ability to use the trading platform correctly, the performance of your Forex trading strategy and your risk management strategies. These are all things that you can perfect with your demo account – let us look at how exactly it can help you become a better trader:
Learning
Learning starts with understanding your Forex trading platform and its features. Before you start trading with real money you should be able to answer all the following questions about your platform:
- What are the functions, the keyboard shortcuts, and the various order types? How are all these deployed?
- How do you pull charts, change from one-time frame to the other, or add indicators?
- How do you deploy your Forex expert advisors (EAs)?
- How do you add custom indicators to your platform?
- How do you execute functions such as one-click trading, adding or removing indicators with two mouse clicks, or add or remove charts for various assets?
- How do you set up market orders, pending orders, stop loss and take profit orders? What is the importance of using a trailing stop order and how do you adjust indicator parameters?
Testing: New Strategies, Indicators and Robots
Once you have mastered the use of the trading platform, it is time to use your demo Forex account to test your strategies and to learn the best use of indicators and Forex robots. The emphasis is not to give yourself a false sense of security by just posting profits, but to understand how each indicator works, and to find out whether your indicators and robots will work in live market conditions. You will also need some theoretical knowledge of the categories of indicators available and how they are used.
Attaining Platform Experience: MT4, MT5, cTrader, Proprietary Platforms
It makes a lot of sense to open a Forex trading demo account with the same platform that you will be trading a live account with. You should also use the same amounts you will fund your live accounts with, so you can use the same lot sizes and other trade parameters to mimic the exact conditions that you will face in live trading.
More than 98% of Forex brokers offer demo accounts on the MetaTrader 4 (MT4) platform. However, the MetaTrader 5 (MT5) and cTrader platforms are also available for those who want extended functions such as algo trading (cTrader) or a Depth of Market (DOM) tool (MT5). Some brokers will also offer proprietary platforms, but you should only use them for demo trading if you plan to open a real account on the same platform.
Learning to Trade with a Forex Demo Account
When you are learning to trade Forex with a demo account, these are the concepts you should cover as part of your practice sessions.
Order types
Know the order types available on the platform you will use. The common order types are buy/sell (instant orders to buy or sell a currency pair at market price), limit orders and stop orders. But these are not the only order parameters you need to know. You should know how to set the prices for pending orders and set the expiration time for execution of pending orders (i.e. Good-till-Cancelled or Good-till-day for trader-specified or end of day expirations for pending orders respectively).
Leverage, Margin, Spreads and Currency Pairs
You should know how to set a lot size for your trade without jeopardising proper risk management. This means understanding how leverage and margin can affect the size of your orders. It is also important to know the spreads for each currency pair you plan to trade and to discover whether they are fixed or variable.
You should go through the list of currency pairs and know which ones are the major currencies, minor currencies and exotic pairs. Understand how they are priced and why exotic pairs have a larger range of movement than major currencies.
Charting and Tools
You will need to understand how plug-ins work; Autochartist will plug-in directly to MT4/MT5 and cTrader and will help you detect chart patterns and trading opportunities. Learn how to add such plug-ins to the platform and onto charts. Use your Forex demo account to understand how to add indicators and EAs to the charts, and how to enable/disable them, especially if you are conducting trading using a VPS.
Fundamental Analysis: How Fundamentals Affect Price and Volatility
How does the news affect price action and volatility? Most brokers will have an economic calendar with the upcoming data releases for the major economies but trading geopolitical events, such as Brexit or the Coronavirus Pandemic can be a very tricky business. Know how each currency pair that is listed on the news calendar responds to the high-impact news releases. Know how the initial spikes occur and how they can be traded. Get an understanding of the advantages and pitfalls of direction-based and non-directional trading.
Technical Analysis: Support and Resistance Levels, Signals and Patterns
Each platform comes with a variety of line tools, Fibonacci tools and other tools necessary for chart studies. With a Forex demo account, you can learn how to use these tools to plot support levels, resistance levels, chart patterns, retracement and extension levels, and create trade alerts.
How to Choose A Demo Account?
The best Forex demo accounts are those which are free and unlimited. These allow you to practice at your own pace, whenever and wherever possible. You are not under pressure to complete your practice period within a set time. Unlimited accounts also help you to continue your trading studies once you have a live account.
Demo accounts will often stay open indefinitely once the trader opens a live account, and are the most suitable testing environment for new tools and strategies before trying them out in live trading.
You will also want to compare the various trading platforms in the market and assess their suitability for demo account use. MT4 is supported by nearly every Forex broker and is a good, user-friendly platform for beginners to start with. MT5 has all the features of MT4 but also has some extended features such as a depth of market (DOM) tool and the use of expanded time frames.
It is important to reiterate that a demo account is your live account simulation. Therefore, you would be best served opening the account with the same minimum trade size as you would use in your live account.
Most Forex platforms are also available as mobile apps. Mobile trading apps have evolved a lot over the years since the first ones became available a decade ago. To a large extent, the functionalities of Forex demo accounts available on desktop platform terminals are now captured by mobile apps. If you plan to be doing a lot of mobile trading, it makes sense to open and operate a demo Forex account on a mobile app as well.
Live Account vs Demo Account
A common pitfall of Forex demo accounts is the psychological aspect of using them. When traders know that no real money is involved and nothing is at stake, they tend to switch off and disconnect from the seriousness of the situation. There is a tendency to behave more carelessly when trading with a demo account. However, when real money is involved, traders will find anxiety and self-doubt to be near-constant companions. Forex trading with a demo account cannot prepare you for dealing with these emotions, and you should be prepared for this psychological challenge.
Furthermore, slippages and requotes that can occur in real money trading do not exist when using a demo Forex account.
How do you open a Forex Demo Account?
Opening a demo account only takes a few minutes. To get started:
- Visit a Forex broker where you would like to open an account
- Complete your personal information
- Verify your phone number or email address
- Follow the instructions on your screen and in your email.
The Best MT4 Demo Accounts
The best MT4 demo accounts offer real market conditions, premium charting packages for free, give beginner traders access to educational content, and trading using mobile phone applications.
- BrokerMin. DepositMin. Spread
GBP 50.0 pips
GBP 200Variable pips
GBP 1000.6 pips
GBP 1000.9 pips
We have a guide to setting up MT4 should you need the assistance getting started and more detail where we compare MT4 Forex brokers side-by-side.
The Risks of Forex Trading
Forex trading is very risky, and much of the risk is hard to manage.
If you are concerned about making trading losses, or if you feel that you can make smarter trades, you should take note of the following: A tiny percentage of traders consistently predict the market and fewer still make significant returns, so starting with a risk-free account is a wise move. The Financial Conduct Authority, the UK’s financial regulator, has data showing that 82% of traders will lose money on these products, so it is highly recommended to open a demo first and apply the risk management that is available to you before investing money.
Recommended Reading
If you are new to trading and don’t know how forex trading works, it is wise to start your reading here, and then move off to learning to trade Forex, and how to open a trading account.
Forex Risk Disclaimer
Trading Forex and CFDs is not suitable for all investors as it carries a high degree of risk to your capital: 75-90% of retail investors lose money trading these products.
Forex and CFD transactions involve high risk due to the following factors: Over-leveraging, unpredictable market volatility, slippage arising from a lack of liquidity, inadequate trading knowledge or experience, and a lack of regulatory protection for clients.
Traders should not deposit any money that is not disposable. Regardless of how much research you have done, or how confident you are in your trade, there is always a substantial risk of loss. (Learn more from the FCA or from ASIC)
Our Methodology
Our State of the Market Report and Broker Directory are the result of extensive research on over 100 Forex brokers. The explicit goal of these resources is to help traders find the best Forex brokers – and steer them away from the worst ones – with the benefit of accurate and up-to-date information.
With over 150 data points on each broker and over 3000 hours of research and review writing, we believe we have succeeded in our goal.
In a world where trading conditions and customer support can vary based on where you live, our broker reviews focus on the local trader and give you information about these brokers from your perspective.
All research has been conducted by our in-house team of researchers and writers, gathering information from various company representatives, websites and by sifting through the fine print. Learn more about how we rank brokers.
