There are two types of trading accounts available from most online forex brokers’; these are the “demo” or practice account and the “live” or real money trading account. We take a look at both of these types of accounts as well as their differences in terms of demo and real live trade. A demo account for forex trading is a simulated account during which trades may be initiated and liquidated in real time, using real time data extrapolated from this marketplace. Real trading funds are not at risk and no money changes hands. They are offered to potential traders attract more business for the forex broker and are in fact fantastic for traders to practice with, but provide no tangible profit or loss.
Demo accounts are a great model for the novice forex trader to learn the business and any errors or bad habits can be nipped in the bud before any harm is done. The demo account is also obviously a way for the potential trader to try before they buy in terms of the brokers’ services and trading platform. The trader may test their own trading strategies and see if the platform meets all their own requirements, and has all the right tools, before opening a live account.
Live accounts are funded forex trading accounts; real trades take place and real money is on the line. There are a range of services in terms of the size of the account and amount of leverage on offer. Most forex brokers start by offering small accounts – being micro or mini accounts, and these may often be opened with a first deposit of less than $100. These accounts also offer limited services, with smaller minimum lots or dealing amounts. Standard and VIP accounts are bigger live trading accounts which obviously require larger deposits of money from the forex trader. They also obviously offer better services as well as more access to leverage which means bigger trading lot sizes.
Because no actual money is placed at risk in a demo account, it is significant to note that there are major differences in the successes of demo trading as apposed to live forex trading. These variations arise from a number of causes such as performance chance, order execution, pricing and the big problem – emotional response. There are hugely differing emotional responses in the two sets of values. One – when no tangible funds are at stake and the other when substantial amounts of money may be at risk. This emotional response is one of the reasons why some traders use automated forex software. However the trader does need to learn to take all these variations into account with a live trading plan.
Because of these variations, some forex traders opt to use micro or mini accounts for demo or learning purposes. This way they are confronted with a real possible trading situation, without having huge amounts of money at risk. It also allows them to experience their own emotional responses and test what kind of performance they may realistically expect from the broker. This would be more of an “experimental” account as apposed to a “demo” account.