Have you ever bought something before trying the product first? More precisely, have you ever purchased an expensive product (e.g., car, house, boat, etc.) without knowing as many details as possible about it? Probably not.
Then how come Forex traders don’t use a demo trading account before opening a live one? The motivation should be the same, or even more acute.
When buying a car, for example, you have nothing to lose. You exchange values with the seller: against your money, the seller provides the goods. Next, you enjoy your product.
Trading Forex differs. Traders open a live account without knowing anything about the Forex broker’s offering, conditions, spreads, and so on, and don’t have a “guaranteed” product life. You’re as good as you have funds in the trading account.
Hence, there is a more significant risk when opening a trading account, as traders may experience losing all their funds and end up with nothing. At least, when you bought a car, you end up with the car.
Still, people would research before buying a car, but won’t do the same before opening a trading account with a broker. This is a mistake, and below we’ll list the reasons to open and use a demo account before committing to live trading.
Why Using a Demo Account?
Forex brokers won’t offer a demo account forever. I mean, some still do, but very few. The idea is to make clients wanting to jump into the market and trade, for the sake of gaining a commission.
As such, traders have access to a demo account only for a limited time. Yet, it is good enough to form an opinion about the broker and possible issues one might have.
Here’s a list with some of the things to check before opening a live trading account:
- Connectivity. Some brokers have in-house built trading platforms that require different resources than the classic MetaTrader4 or 5. Even though the platform may ultra-perform, if it slows down the computer, problems with executing a trade may arise.
- Server time. Brokers have their servers located in various parts of the world, depending on where they buy the liquidity from. Therefore, the closing time of a candle depends on the server time. Of course, on the hourly chart, there would be no difference, but the four-hour, daily, and other more significant time frame will display different values as closing prices. That’s something to consider when using technical analysis, as all indicators (both trend and oscillators) will interpret different data. Ideally, the broker allows you to set up the closing time for the candles. How to check that? By using a demo account first.
- General trading conditions. Things like commissions, spreads, slippage, overnight swaps, make a difference and represent a potential cost for a trader. If the broker executes big trades with huge slippage, that might be a problem. Moreover, can the broker execute bigger trades as fast as small ones? All in all, these conditions differ from broker to broker and from trading account to trading account.
- Product offering. Check other products offered by the broker, as trading these days doesn’t refer only to currency pairs, but to a variety of other markets (gold, oil, silver, stock indexes and other cfd’s).
Just like you won’t buy a new car before knowing everything about it, you shouldn’t open a live account with a new broker without testing before the trading conditions and the products offered.
Make sure you test everything needed and if there’s not enough time to check everything, ask for the broker to give you more. UK brokers will always strive to offer the best customer service, and such a request will be granted without a shadow of a doubt.
When picking a broker, you choose more than that: you select a partner. It is in the broker’s interest for its traders to actively open positions, as more commissions will pour into the business.