Trading on a Demo Account
Forex brokerage industry is one of the most competitive industries in the world. It is extremely popular and profitable as well, hence it is no wonder there are so many Forex brokers out there. Each broker tries to differentiate its products and offerings in such a way that it is having an inflow of new customers and in the same time it is retaining the old ones. This is much easier to say than done. Because of this stiff competition, brokers are looking for new ways to attract traders, like offering products that are not really connected with the Forex market but are similar. Such products are CFD’s (Contracts for Difference), indices, various commodities, etc. No matter the Forex broker you want to open an account with, before funding a live account, a demo version should be tested. This is a mandatory thing but, unfortunately, traders are not doing that. The reason for not doing that comes from the fact that Forex trading seems so easy, it is advertised as being easy, and people believe that. In fact, it is one of the most difficult things to do as it requires attention to be dedicated daily and some funds that can be lost. This leads to people/future traders to skip the logical process until trading on a live account as they are feeling that opportunities are being missed. Such an attitude explains the reason why over ninety percent of Forex traders are losing their first deposit in six months or less since funding. In other words, homework was not being done! Trading on a demo account is part of this homework and the intel that can be collected can prove to be crucial to a Forex trader.
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Demo Accounts Usefulness
Traders always wonder what is the purpose of a trading account and why brokers are offering them. The right answer is that the information from a demo account is valuable for both traders and brokers.
Why Brokers Offer Demo Trading Accounts
Almost all Forex brokers offer a demo account before traders engage in live trading. However, as always, there is a catch or a reason why this is happening. There is nothing for free in this world and especially in the Forex world. Everyone is looking to gain something: brokers are looking for new clients, and traders are looking for the best trading conditions possible. From a broker’s point of view, offering a demo account is mandatory. Brokers that don’t do that are missing some great opportunities. There are multiple reasons to explain the above statement. Firstly, when offering the possibility to trade on a demo account, the Forex broker is asking beforehand the contact information. This means email, physical address, phone number, etc., … all the necessary information for the broker to use it to market future events/offerings to these clients. In other words, while it seems as being something that the broker offers for free, it is not. Promoting a digital business is a bundle between classical marketing techniques and new ones. Email marketing and digital marketing are nowadays equally important as other classical ways to promote a business. This is even more important if the business is a web-based one! And we all know that Forex brokers are web-based businesses, and therefore gathering as much information about possible clients as possible is crucial for further developing the business. On top of that, brokers are looking at the trading style and the performance of a trader in a demo account. Depending on the type of the brokerage house, this is valuable information in case the trader decides to open a live trading account. Some brokerage houses are taking trades against their clients, to profit from the wrong crowd position. This is both legal and extremely profitable if you consider the fact that chances are on the broker’s side: more than ninety percent of traders are losing their first deposit in the first six months. Therefore, brokers are using the info from a demo trading account to know the category where to place the traders. Even if the trader is not opening a live trading account, it is still enough for the broker to market future products and promotions.
Why Traders Must Use a Demo Account
As mentioned earlier in this article, traders are not using a demo account, even though this is mandatory. The thing is that the info offered by a demo account is so important for the trader that it is the decisive thing before opening a live trading account. Trading in a demo account should be made for a minimum of one trading week, if not more. During this period traders see how the spreads are changing during important economic events, check the slippage in execution, if any, and, overall, test and see if what the broker offering is real. Many times, brokers are advertising something and offer something else, and during the demo trading, these things are easy to spot. After all, what’s to lose? One or more trading weeks will be enough to have an idea about execution, slippage, spreads, overnight swaps, etc. After this info is known and if it corresponds with what the broker offering is, then opening a live account is the next step.
Recommended Further Readings
- Financial Products to Trade
– Different categories of financial products that a Forex Broker is offering for the retail clients, starting with the classical currency pairs, and continuing with commodities, CFD’s, indexes, etc.
- Forex Trading Sessions and Their Importance
– Explaining the differences between the three Forex trading sessions, what are their importance, ranking, etc.
- Forex Brokers Types – ECN or STP?
– What is ECN, STP, how d- brokers deal with client’s orders, advantages, and disadvantages of the tw- types.
- What Makes a Good Forex Broker?
– Things to consider when deciding what broker to trade with. What are the factors that weigh the most in the decision-making process?