The Forex brokerage industry is one of the most competitive industries in the world. It is extremely popular and profitable as well, and hence it is no wonder that there are so many Forex brokers out there. Each broker tries to differentiate its products and offerings in such a way that it has an inflow of new customers, while at the same time retaining the old ones. This is much easier said than done, though. Because of this stiff competition, brokers are constantly looking for new ways to attract traders, such as offering products that are not really connected with the Forex market, but are similar. Such products are CFDs (Contracts for Difference), indices, various commodities, etc. No matter which Forex broker you want to open an account with, before funding a live account, a demo version should be tested. This is an essential thing but, unfortunately, many traders do not do it. The reason for not doing it comes from the fact that Forex trading seems so easy; it is advertised as being easy, and people believe that. In fact, though, 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 skipping the logical process and going straight to trading on a live account, as they feel that opportunities are being missed. Such an attitude explains the reason why over 90% of Forex traders lose their first deposit in 6 months or less of funding it. In other words, they did not do their homework! Trading on a demo account is part of this homework, and the intelligence that can be collected can prove to be crucial to a Forex trader.
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Demo Accounts Usefulness
Traders often wonder what the purpose of a trading account is, 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 to traders before they engage in live trading. However, as always, there is a catch or a reason why this is done. There is nothing free in this world, and especially not 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 essential, and brokers that don’t do it are missing some great opportunities. There are numerous reasons to explain the above statement. Firstly, when offering the possibility of trading on a demo account, the Forex broker gets to ask beforehand for contact information. This means email, physical address, phone number, etc. – all the necessary information the broker needs to market future events/offerings to these clients. In other words, while it seems to be something that the broker offers for free, it is not. Promoting a digital business is a mixture of classical marketing techniques and new ones. Email marketing and digital marketing are nowadays equally as important as other classical ways to promote a business. This is even more important if the business is a Web-based one! We all know that Forex brokers are Web-based businesses, and therefore gathering as much information as possible about potential clients is crucial for further developing the business. On top of that, brokers look 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 the event that the trader decides to open a live trading account.
Some brokerage houses take 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 90% of traders lose their first deposit in the first 6 months. Therefore, brokers use the info from a demo trading account to know the category to place the traders in. Even if the trader does not open a live trading account, it is still enough to allow the broker to market future products and promotions.
Why Traders Must Use a Demo Account
As mentioned earlier in this article, many traders do not use a demo account, even though this should be mandatory. The thing is that the info offered by a demo account is so important for the trader that it should be the decisive thing before opening a live trading account. Trading in a demo account should be done for a minimum of one trading week, if not more. During this period traders see how the spreads change during important economic events, check the slippage in execution, if any, and, overall, test and see if what the broker is offering is real. Brokers often advertise one thing and offer something else; and during the demo trading period, these things are easy to spot. After all, what’s there to lose? One or more trading weeks will be enough to get an idea about execution, slippage, spreads, overnight swaps, etc. After this info is obtained, and if it corresponds with what the broker is offering, 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 offers for retail clients, starting with the classical currency pairs, and continuing with commodities, CFDs, indexes, etc. - Forex Trading Sessions and Their Importance
– Explaining the differences between the three Forex trading sessions, and their importance, ranking, etc. - Forex Brokers Types – ECN or STP?
– What are ECN and STP; how brokers deal with clients’ orders; and advantages and disadvantages of the two types. - What Makes a Good Forex Broker?
– Things to consider when deciding which broker to trade with. What are the factors that carry the most weight in the decision-making process?
Other Educational Materials
- “Transitioning to Real Trading.” Cofnas, Abe. The Forex Trading Course: A Self-Study Guide To Becoming a Successful Currency Trader, Second Edition: 179-182.
- “Account Management.” In Forex for Beginners Kritzer, Adam. , pp. 213-228. Apress, 2012.
