What Is a Demo Account In Forex Trading

Posted On April 19, 2021, 10:02 am by Christina Clarke

Forex trading refers to regular trading or exchanging of currencies from the foreign exchange market. Individual traders or brokers need an authorised bank or broker to complete a transaction. Direct dealing with the foreign exchange market is not accountable. An intermediary bank or broker is mandatory for forex trading. Online brokers are offering a demo account in forex trading.

What Is Forex Trading?

Currency trading and forex trading are similar terms used to describe trading in different currencies worldwide. Various national or international currencies are exchanged with each other with the motive of earning profits. All these actions are described as forex trading or currency trading.

The Role of Foreign Exchange Market

The foreign exchange market is the marketplace for executing currency trading. This market has no physical location. Rather than it works over-the-counter globally, this is the only market that is responsible for the price determination of various currencies. The market analyses the demand and other factors related to currencies to determine prices.

What are Currency Pairs?

Currency pairs are designed for forex trading. Two currencies and the exchange rate are quoted in a currency pair. It comprises two types of currencies: the base currency, and the second is the quote currency. The exchange rate describes how many units of the quote currency need to be spent for one unit of the base currency. It is recommended to use a demo account in forex trading if you want to understand currency pairs.

Base Currency – It is the currency that is listed in the first place in a currency pair. Hence, the exchange rate is determined for one unit of the base currency. For example, in USD/AUD, USD is the base currency.

Quote Currency – The second currency mentioned in a currency pair is known as the quote currency. The exchange rate is calculated to show the number of units of quote currency required to buy the base currency. In the above example, AUD is the quote currency.

Types of Currency Pairs

Currency pairs are divided into three main categories according to the foreign exchange market. The three main categories are:

Major Currency Pairs – The most liquid currency pairs are known as major currency pairs. These pairs are the currency pairs combined with the US dollar (USD). Traders need to find trade opportunities with major pairs because the exchange rate with these pairs faces very little fluctuation.

Cross Currency Pairs – Cross currency pairs are the one which includes currencies of stronger economies of the world. The exchange rates of these pairs face movement based on political and economical factors. These currency pairs are less liquid as compared to major currency pairs.

Exotic Currency Pairs – Currency pairs with currencies of developing countries are known as exotic currency pairs. Those currencies of developing economies are paired with the currencies of developed economies. These currency pairs are the least liquid as compared to any other currency pairs.

What Are the Best Forex Trading Strategies?

There are a huge number of trading strategies for forex trading. Traders can also design their own trading strategies according to market research, studies, and with the use of a demo account in forex trading. Some of the leading forex trading strategies are:

Price Action Strategy

This trading strategy does not involve studying external market factors rather than it only includes candlestick price chart studying. The price chart is studied to identify potential trading opportunities, and it is completely focused on the price movement.

Market factors such as economic news, political relations, and others are not required to be studied. This method is used along with day trading or swing trading. It is based on the real-time results of price movements.

Forex Scalping

Trading practices with short-term trades and price movement of only a few pips is known as forex scalping. Frequent but small profits are earned in this type of trading. Traders who use this trading strategy prefer high volume trading and more studying of the market factors.

It is practiced with most liquid currency pairs, which allow traders to enter and exit positions quickly. Risks are higher with this trading strategy as no tool for risk management is used. Traders who are trading with huge funds generally practice this trading strategy.

Day Trading

Day trading is a trading strategy that is focused on eliminating the overnight risk of price movements. Traders need to invest sufficient time to study the market and find trade opportunities for potential profits.

Traders carry multiple trades per day and make small to medium amounts of profits with every trade. Major news and market study is required to perform day trading. Intraday price changes lead to profit or loss generation.

Swing Trading

Traders who like to hold their positions for the medium-term can use swing trading. Profits can be generated with ‘high swings’ or ‘low swings.’ An opportunity needs to be analysed along with the right entry and exit points.

Political and economic factors need to be studied to predict where the price can go. Currency pairs with low liquidity and wider spreads are good for swing trading. Trading duration is mostly predetermined in this trading strategy.

Forex Hedging

Forex hedging is a trading strategy that is focused on protection from undesirable currency price movements. Traders hold both positions that are long and short positions for a single trade. Traders who love to trade with long-term positions can reduce their losses with short-term hedging.

Major pairs which are more liquid are usually used in forex hedging. Higher capital is required to hedge a currency from both the sides, such as long and short positions. It is entering the market with better profit-making. 

Position Trading

It is considered a trading strategy for patient traders because it is for the long-term. The main aim of this strategy is an opposite price movement as compared to the time of entering. Traders hold these positions for many months, weeks, or years.

Market understanding is required to trade with position trading. Traders who cannot spend hours for daily market analyses use this trading strategy. Sufficient capital is required for investment as it is for the long term.

Why There Is a Need for a Broker?

A central bank, commercial bank, or broker is mandatory for forex trading as an individual cannot complete a transaction on his own. Traders like to trade with brokers because forex brokers are providing online platforms for trading. Rather than banks, brokers make transactions fast and easy to execute.

One of the best features of online brokers is that they are also providing a demo account in forex trading. A demo account lets traders practice the trading process of the platform. It also helps traders to understand the mechanism of forex trading in a better way. A demo account in forex trading is loaded with fake funds for traders to make transactions.

Benefits of Trading with a Demo Account

A demo account in forex trading plays a crucial role for every trader. Traders should use a demo account when trying to forex trade for the first time or switch their broker. It has fake funds for trading, and many other benefits are associated with it. Some of the benefits of a demo account are:

Traders Get Used to Market Risks

One of the most important benefits of trading with a demo account is that traders get used to market ups and downs. Traders lose their money in trading fear when they trade with real funds. A demo account helps them in becoming habitual of forex trading practices.

Helps Understanding the Platform

Trading research tools and educational material are offered by brokers for free. Traders can understand the trading platform in a better way when they are trading with a demo account. The reason behind this is that they don’t have the risk of losing funds. This lets them trade freely and try all the tools provided by the broker.

Develop New Trading Strategies

As the risk of losing funds does not bind traders, they can try new strategies. A demo account allows them to experiment with new trading strategies. While trying new strategies, traders should trade like they are using real funds. This will help them to make better decisions and manage their funds to earn a profit.

Don’t Have to Risk Real Funds.

Traders have the opportunity to trade using fake funds offered by the broker for free. They are safe from losing their money in the market. But they should treat the funds provided by the broker like their own funds. Through this way, they can get better results as their actions will be according to the way they are using their funds.

Learn About Price Indicators

Trading with a demo account gives traders to learn about the price indicators. Various types of indicators can be used in forex trading. Online brokers let traders analyse all the market price indicators for currencies. These indicators are free to use with almost all forex brokers.

How to Open a Demo Account in Forex Trading?

While you are creating an account with a broker for trading, it will ask you for the same. Traders get the option of starting with a demo account or with a real account. The broker asks it at the time of registration. From there, only you can opt for a demo account in forex trading. Utilise this friendly feature offered by your broker before you risk your funds.

How Long Should You Use a Demo Account?

There is no specific time for which you should use a demo account for trading. According to research, it is concluded that traders should use it for a minimum of six months. It is because traders get to experience many ups and downs of the market within six months. Or traders can even use the demo account till the period they start making enough profits according to their goals.

Are Forex Demo Accounts Accurate?

Forex trading with a demo account is not exactly trading in a real situation. The broker creates the situation faced by a trader in a demo account to make a trader used to various trading situations. They are much like real outbreaks that are faced while trading. However, the funds are also fake and provided by the broker to build a habit of trading.

In short, traders get to face similar problems that a real broker faces. So it is good to start with a demo account instead of rushing with a real trading account.

Leading Brokers for Forex Trading

When it comes to trading, it is essential to choose the right broker. It will help you to get the best trading results. There are hundreds of options available, but traders should compare different brokers and then go with the one that fulfills their requirements. A few of the leading forex brokers for beginners are:

Brokereo:

Brokereo is a leading broker for forex trading with many features that traders require. The trading facilities of Brokereo are:

  • A free demo trading account for all traders.
  • MetaTrader 4, WebTrader and Mobile App trading platforms.
  • Traders get a 1:500 trading leverage for forex trading.
  • A wide variety of research and educational material available.
  • 350+ trading instruments, including forex trading
  • 5 days of customer support in a week.
  • Commission-free trading and lower spread charges.

InvestLite:

InvestLite is offering extraordinary trading services that traders require. Leading features of this broker include:

  • Traders get a free demo account before starting with a real account.
  • WebTrader, Mobile App and MetaTrader 4 trading platform.
  • Trading leverage up to 1:500 according to the account type.
  • A large number of educational materials and research tools.
  • More than 300 trading instruments for trading.
  • The broker offers 24/5 customer support.
  • Lower spread charges and zero commission trading.

101investing:

Traders get a friendly platform with 101investing and many other features that make this broker one of the best online brokers. The features are:

  • A demo account with other trading accounts for traders.
  • MT 4 trading platform that can be accessible from the web, desktop, and mobile.
  • Offered maximum trading leverage of 1:400.
  • A huge collection of analytical tools and educational resources.
  • 250+ financial trading assets are accessible.
  • Traders can get 24/5 customer support.
  • Spread charges may vary, but commission charges are zero.

Capixal:

Capixal is also a trustable broker for new-generation traders. It is also offering a wide variety of trading features that make it a compatible broker. A few benefits with this broker are:

  • Three different trading accounts are offered, plus a demo account.
  • MT 4, WebTrader, and Mobile App are the trading platforms.
  • The highest trading leverage of 1:500 is provided.
  • Multiple types of educational material and research tools are available.
  • 350+ trading assets and financial derivatives are offered for trading.
  • Customer support is accessible 24/7.
  • Limited spreads and zero commission trading.

These are some of the best brokers that also offer a free demo account in forex trading. Account creation is simple and quick with these brokers. Traders get fast access to the global trading market within a single click. The trading platform is also compatible with various devices that is also a positive point.

The Bottom Line

In summary of the above discussion, it is concluded that traders should use a demo account in forex trading. Because every trading platform is new and offers different features, you should go for demo trading before risking your funds in the market if you are a beginner. This will assist you in learning market fundamentals in a better way.

In a demo account, traders get to face situations like they are real. You can also use it for experimenting with new things. In short, traders should start with a demo account because many benefits can be gained if you are trading with a demo account.

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