Automated Forex Trading

A Forex demo account is an excellent tool for learning currency trading without losing your hard earned money. These days most forex brokers offer Forex Demo accounts since they know that the beginner traders love to test the trading systems before they start trading with real money on live accounts. But many new traders are worried if the forex demo accounts are real deals or are there any hidden costs which the broker is not telling. Well let’s see how exactly the forex demo accounts works and what are the precautions you should take while using a forex demo account.

Why do Forex Brokers offer Demo Accounts?
The Forex trading brokers offer demo accounts or virtual trading account because they want you to try out their trading platform. Brokers hope that you will like their trading platform and find it easy to use and perhaps choose their service for your trading needs. They know that once you make money in your demo account, you will be more likely to invest real money with them. These types of offers are natural in any business. You know the fitness centers offering one week trial. If you like their facilities you continue by becoming a paying member or you quit. Same techniques apply here as well.

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Forex Demo Account Tips:

There are few things you must take care while dealing with a forex trading demo account.

Demo Vs Live Accounts:
The first thing after you signup for a free demo account is whether the demonstration account does actually work in the same way as the real trading platform. Though usually they both live account and demo accounts work in the same way in very few cases, it does not. I have heard from new traders who became comfortable with a broker’s demo account system, invested money into their live account only to find that the real platform is not the same and require a whole new learning curve. Some bucket shops who pose as established forex brokers offer such demo accounts to boost the confidence of the traders by making the demo mode highly user friendly where as their real trading platform is complicated. So do check that out before even starting with a demo account.

I should also mention that it is important to know that different platforms may work in different ways in demo mode. Most platforms will allow some form of testing so that you can get familiarize with the way they work. Nevertheless when I talk about forex demo accounts, I mean a system where you have a balance of virtual funds which will increase and decrease as you trade. Hence forex demo accounts allow you to test you trading systems as well as to get acquainted with the platform.

Psychological Differences:
Next, be conscious of the fact that there are major psychological differences between trading in demo mode and trading on live account. When you are using a demo account for the first time you will happily jump into demo trading, often using high leverage and opening trades almost at random, just to see if ‘it works’. In the long term, this type of trading is destined to lose, but in the short term, you might make some profits. And you might end up thinking that it is pretty easy to make money with forex trading and then without worrying too much about analysis, indicators, plans or even a profitable trading system you will switch to a live account. Let me warn you. If you are not familiar with the forex trading basics and if you do not have a profitable trading system, then you are heading for a crash. Also do not play with demo accounts for too long or else you will develop a player’s (gambler) mindset.

Stress and Greed – Money Management
I can’t stress the importance of money management enough. There are many traders use their demo accounts responsibly and well to make sure that their trading system is good. But then they fail to apply a profitable system with sound money management. They may not be prepared for the stress of real money trading and when they start trading with real money, they get greedy when the trend is going in their way and are panic when the trend goes wrong and finally end up making irrational decisions.

Hence before you go live, understand that real trading does have stresses that trading in demo mode cannot prepare you for. The solution to overcome this problem is to start small when you move to the real market. Forex demo accounts when used wisely can be a very useful tool for the new forex traders.

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This entry was posted on Automated Forex Trading on March 21, 2010 at 10:39 pm and is published under Learn Forex Trading. . Both comments and pings are currently closed.