A Forex demo account is a free practice account for a limited time only. This usually lasts for 30 to 90 days, within which the user is supposed to determine if it is worth signing up for or if the broker is worth partnering with. Below are a few things you should consider.
Things to Avoid
First you need to understand that there are red flags you want to avoid. This way you are not duped into signing up for a free demo account. And getting milked for everything you have got.
These brokers will hide behind some of the best forex accounts. And are willing to give you the same for free, provided you sign up for their service. This usually involves huge leverage amounts. One way to avoid them is to insist on a demo account. Even after a successful demo run, start with low leverage amounts and get a feel for what your broker is up to. This way you can say no or discontinue your membership if you are not comfortable with the trading strategy of your broker. Tip: take advantage of blog sites and social networking sites to know what and who to avoid.
Rules are Rules!
This means margin rules. A broker must disclose the exact amount and risk you are taking. A common newbie mistake that happens more than you think, is the user thought he can only lose as much as the account deposit (margin). This is usually worth $100 to $500, no biggie right!? Wrong! Forex accounts leverage actual money, usually anywhere between 100:1 to 1000:1. The average leverage ratio is 250:1. This means that for every $1 deposited you can risk $250. If you win then a $100 trade can result in a profit of $25,000. If you lose you will have to pay in proportion to that $25,000 and not merely the $100 you have on your account.
What is worst is that your broker has a say, and can actually steer you into using the full leverage amount. Pay attention to your margin agreement. It will tell you just how much discretion a broker has to affect a trade to “protect their interests.” By applying for a forex demo account you get to have an idea of the margin agreement, leverage ratio, and the way your broker works.
When you first get your demo account you should acquaint yourself with the practice account functionality. Not only are you able to hone your skills but at the same time you are able to check your strategy. Remember, most practice accounts use previous trading data as a basis for the practice scenario. This means you plan and execute your strategy then check more recent data to determine if your strategy was spot on and if you read signals and indicators correctly.
Try Out Short term to Long Term Strategies
Newbies are able to utilize the forex practice account function of the demo account in order to get a feel of technical and fundamental analysis. The former is the strategy of choice for newbies and individual traders. It utilizes short term price movement in order to get the best trading position. The trading is short term to midterm and the trading volume is high. This means buying low and selling high, then buying low again, albeit more, then selling high, and so on and so forth.
If you are lucky enough to get a 90 to 120 days trial period, immediately take advantage of the same to practice your fundamental analysis. This is because this type of strategy is for the long term. A 1 month trial just won’t cut it!
Demo Account Surfing
This is the term used for users who want to avoid paying for a forex account. Simply put, they sign up for a demo account and when the same is about to expire, sign up for another demo account. The user is not trying out different accounts to find the one that suits him best. Rather, the user simply does not want to pay for a forex account.
There is no law prohibiting this. It is actually sound thinking, as far as it goes that is. Why pay when you can get the service for free, right?! Not necessarily. This is because you will spend a few hours to acquaint yourself with a different user interface. More importantly, most demo accounts only allow the user to utilize basic functions. These functions i.e. charting software, SMS alerts, regular newsletters, and other premium functionalities are withheld precisely to deter demo account surfers.
Read the Manual
This is arguably the most important reminder of all. It is also the simplest, but also the most neglected. Read the instructions. You signed up for a forex demo account to utilize the full functionalities of the same and then determine if it is worth paying for. How will you know if it is the right forex account for you if you do not know what it actually does?