Forex Demo Account Trading

Practice forex trading and learn how to win

Reviewed by Thomas J. Catalano
Fact checked by Vikki Velasquez

It’s crucial to learn how to use the features of a forex platform before you start trading on it. Fortunately, traders can test out each platform using a demo account so no real money is at risk. Demo trading is critically important but you have to know what to look for when trying different platforms.

Key Takeaways

• Every platform is different so even experienced traders must learn how each works before trading with real money.
• It’s generally a good idea to place at least 50 demo trades to figure out how crucial features like stop orders work.
• Forex demo accounts can also help traders learn how good platforms are at recording transactions for tax purposes.
• Demo trading isn’t the real thing but it can help traders prepare for using live accounts.

Each Platform Is Different

Many brokers offer several platforms. MetaTrader 4 and 5, also called MT4 and MT5, are both popular. Most brokers provide additional platforms but these options may be proprietary to the broker. The platform might not be available from other brokers.

Each platform may function and look slightly different but most provide roughly the same features. They include forex quotes/prices, charts, technical analysis tools, news feeds, trade history, drawing tools, and functionality for buying and selling currencies.

Some platforms have more features than others. Some of them have integrated fundamental analysis tools. That can be important for a long-term investor but it doesn’t matter for a short-term trader.

This is a snapshot of the MT4 platform.

Shortcuts along the top of the platform go to various tools and settings. There’s a charting window below these shortcuts where you can see the price history of a currency pair or other asset. The terminal is beneath the charting window. Multiple tabs in the terminal provide access to news, account history, and current trades. Not every platform is set up this way but most offer the same features. They’re just arranged differently.

Placing Orders

It’s a good idea to place at least 50 demo trades on a platform to master the specifics of order entry before trading money. A trader should never trade live unless they can confidently answer all the following questions:

1. How do I place a limit order?
2. How do I set a stop order?
3. Can I set a limit and a stop at the time of entry?
4. Are the spreads on the platform fixed or variable?
5. What is the typical spread?
6. What is the lot size I can trade: 100 units, 1,000 units, 10,000 units, 100,000 units?
7. Can I mix and match the lot sizes?
8. Do I have another way to trade if my primary internet connection goes down?

Some platforms use pop-up order windows. Others allow you to trade by clicking prices directly on a chart. You can typically click on the offer part of the quote (the ask) to buy a currency pair. You usually click on the bid part when you want to sell. Some platforms allow you to choose a market order or limit order after the quote window pops up but others force you to make your selection first.

This is a sample order screen in MT4. Suppose you want to bring up a detailed order screen like this. You can right-click on a chart or quote on most trading platforms and select a new order or a new trade.

A very short-term chart of the currency pair for the trade is on the left. This currency pair is also listed at the top of the trade box. Next input the volume you want to trade. Enter a stop-loss and take the profit level for the trade. The trade type can be a market order or a pending order. Choose the market as the type if you want to buy/sell at the current price. Choose pending if you want to buy or sell at a different price.

There are more options with a pending order because you must input the price at which you want to buy or sell. You can also choose to put an expiry on the order. Place the order after everything has been filled out.

Important

Learning how to set up a stop-loss order on a platform is vital for most forex traders. It’s the surest way for heavily leveraged traders to prevent large losses when exchange rates suddenly move in the wrong direction.

Taxes

One function that most new forex traders overlook is tax reporting. Forex is a global market so dealers generally don’t provide any documentation to the tax authorities in the trader’s country of residence. Tax reporting is solely the responsibility of the trader. Brokers produce detailed transaction histories from which the trader must then compile their tax reports. Such an arrangement calls for a trading platform with highly organized and flexible reporting functions.

Reporting quality varies greatly from dealer to dealer, however. All dealers will provide you with a full transaction report but how those transactions are laid out could mean the difference between spending hours or minutes creating a final report for your accountant. Some forex traders generate thousands of trades a year. A platform that records all those trades in an easy-to-understand income statement is invaluable.

Tax treatment of currency trading is very much dependent on the individual’s tax status. Most dealers won’t advise you regarding tax matters, nor should you take their advice if they do. Most of them lack the particular expertise to deal with the multitude of tax authorities around the world. You should always consult with a tax professional before choosing a course of action.

More intuitive platforms with more organized reporting of your trade history are generally better for taxes. Look through the trade history and account statements after you’ve done some demo trading. Find out how easy it would be to see your profits and losses for the year. Examining the record of your profits and losses can also help to improve your trading skills.

Trade Like It’s Real

Use the demo platform to experiment with various strategies after you’ve mastered the basic functionality of a trading platform. Are you a short-term momentum trader who likes high leverage and tries to capture 10- to 20-pip moves? Or do you prefer using less leverage and holding longer-term positions that could potentially yield hundreds of pips? Demo trading can help you discover what type of trading suits you best.

Demo trading isn’t the real thing but it does help prepare you for actual trading. Many people are perfectly calm after sustaining a big loss in a demo account but some become completely unhinged over even a small loss in a real account. Trade the demo account as if the money were real to make demo trading as productive as possible.

Easing into real trading is often the best way to start. Some forex brokers such as OANDA allow you to open an account with no minimum deposit. The experience becomes real when you start trading with even a few hundred dollars. Trading small amounts is the natural extension of demo trading.

How Do Technical Analysis Tools Work?

Technical analysis tools are focused on the future. They’re designed to estimate quick changes in the price of a security based on market data of current or past price movements. The prediction can be as short as five minutes with some tools. Others make daily analyses.

What Is Fundamental Analysis?

Fundamental analysis focuses on the company issuing the stock. It involves research to gather data and then evaluating what’s found. Technical analysis is centered on decisions regarding what to buy or sell. It attempts to cash in on quick decisions. Fundamental analysis concentrates on investments you might want to hold onto for a bit of time.

What’s the Difference Between a Limit Order and a Stop Order?

A limit order presets the most you’re willing to pay for a stock and the least you’re willing to accept for its sale. You’re effectively limiting the transaction to your terms. A stop order schedules its purchase or sale when the stock is trading at a specified price or beyond it.

The Bottom Line

Demo trading can be very valuable even after you decide to trade live. Many successful traders will test strategies in a practice account before they try them out with real money. Demo trading doesn’t guarantee profits in a live account but many traders agree that failure to achieve success in a demo account will almost certainly lead to failure in real life. That’s why demo trading is vital to the growth and development of forex traders.

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