Guest Commentary: Benefits of a Demo Account
Most traders start off learning about the Forex markets by trading in a demo account. FXCM offers a wonderful opportunity to hone your skills using fake money on the same platform you will trade on once you start trading real money. This allows newer traders to become familiar with the software as well as its options and functions. A demo account offers numerous other benefits and not just for newer traders, but seasoned veterans alike.
FX trading has a steep learning curve. Every new trader is bound to make countless, costly mistakes; I’ve certainly made too many to count. Starting off in a demo account allows a trader to make many of these mistakes without losing real money. FXCM allows anyone to open as many demo accounts as desired. When I started learning about Forex, I opened two separate demo accounts, each for a different purpose. In the first, I used no trading strategies, no money management rules, and just took trades to watch what happened. I paid close attention to price action on my open trades which taught me about:
- How prices regularly move in various time frames
- Volatility in FX markets
- Understanding and interpreting charts
- Effects on my account of using different amounts of leverage
- The differences between trending and ranging markets
After I begun to understand some of the basics, I decided to take things more seriously using my second account. Before doing so, I went through the Learn Forexsection available on DailyFX at and accessed the On-Demand Video Course offered on the paid section of DailyFX, by requesting a trial log-in. I watched every video in the course and then developed a basic trading plan. Next I got to work in my more serious demo account. I set money management rules, only entered trades in the direction of the trend, used oscillators to time my entries, and forced myself to have the mindset that I was trading with real money.
The use of a demo account shouldn’t end when you start trading for real money. There are countless reasons that continuing to use one will help make you a long-term successful and more profitable trader including:
- Strategy development and improvement
- Access to commodity and index prices for Americans
- Complex charting
- Staying patient
The best traders are constantly working to improve their strategy. One way to do so is to develop new strategies to enter trades with. Once you have determined the parameters of your new strategy you can use a demo account to test it either by manual back-testing or actively trading it. I recommend actively trading for at least one month to see how successful you are. Manual back-testing allows you go back through previous action on a chart and make note of where you would have entered positions, set stops and targets. You then move forward (to simulate a live trading environment scroll back a ways on a chart and then press the right arrow key to move forward one candle at a time) and record how the strategy would have done. Manual back-testing allows you to test countless entries in a much shorter amount of time than waiting for them in a live environment. For more information on manual back-testing, check out James Stanley’s webinar entitled “Practice of Currency Trading” on Tuesdays at 1:00PM EST in the DailyFX+ live trading room.
Using the same method as above, you can also test changes to a current strategy. Say you currently use a strategy where your entry mechanism is MACD but want to experiment with using Stochastics or CCI instead to see if it may be more profitable. Doing this testing in a demo account allows you to determine which oscillator works best before implementing it again with real money.
For clients in the United States, a demo account is an essential tool for technical analysis. Not just any demo account but a UK based ones, which can be requested through FXCM’s support. They provide users with access to stock index futures, such as the S&P500 (SPX500) and many overseas equity markets as well as commodities including Gold, Silver, and Oil. The ability to view these on charts and apply technical analysis is extremely valuable as many currency pairs are highly correlated to at least one. For example, AUD/USD, NZD/USD, and USD/CAD all currently have greater than 80% correlations with the S&P500, which is also a favorite risk trend indicator of many of the members of the DailyFX education team. Watching key levels on gold, oil, and the S&P500 can give a trader insight into potential levels of support and resistance and areas of potential reversal for many of the currency pairs, especially those with a US Dollar component.
Demo accounts also are useful for drawing more complex charts allowing you to view them when needed while keeping the charts for your real money accounts much cleaner and less cluttered. They are also helpful by giving you a way to trade something while waiting for a setup to take place for a real money trade, keeping you from making boredom trades.
Demo accounts are clearly an important tool for traders who are new to the FX markets and looking to learn before opening a real money account, but they are also an invaluable tool for traders with real money accounts too. Technicians from the United States need a UK based demo account to apply technical analysis to charts including S&P500 futures, Gold, Silver, and Oil. They are a wonderful tool for developing new strategies or refining current ones and testing out their effectiveness before implementation in real money trading. Using the numerous benefits of a demo account will give you an advantage over many other traders who don’t consider the benefits that will make you a more successful, profitable trader.
Written By: Brandon Leeds
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.