What is a forex demo account, and how should you use it?

Before you risk any money, you can open a practice account that looks and works like a real one. You get a balance of virtual money and can trade the broker's pairs on live prices.

That makes a demo account the cheapest place to make beginner mistakes. It also makes it easy to learn the wrong habits, so how you set it up matters as much as using it.

What is a demo account?

A demo account is a trading account funded with play money. You open it with a broker in a few minutes, usually with just a name and an email address.

You then log in to the same platform the broker's real clients use, such as MetaTrader 4, MetaTrader 5 or the broker's own app.

The broker usually lets you pick the starting balance, the account currency and the leverage. When you buy a pair, the platform records the trade and moves your balance as if real money were involved.

Losses on a demo cost you nothing, and gains pay you nothing. Any profit stays inside the demo and can never be withdrawn.

Brokers offer demo accounts for free because they hope you will open a real account later. Some brokers delete a demo after a period without logins, so check the terms if you plan to keep one for months.

What a demo copies, and what it leaves out

The screen is the same as on a live account. The chart, the order ticket and the order types all work the same way, and the prices usually come from the broker's live feed.

The difference starts after you click. On a live account your order goes to real execution, where the price can change between your click and the fill.

On a demo the platform simulates the fill, so it often happens instantly at the price on screen. That means demo results tend to look a little better than live ones.

Slippage, the gap between the price you asked for and the price you got, can be rare or absent on a demo. On a live account it shows up most around big news releases, when prices jump.

Costs can differ too. Check that the demo uses the same account type you would open for real, because spreads and commission vary between account types. Also check whether the demo charges overnight swap.

The largest gap is in your head. Losing $300 of virtual money is mildly annoying. Losing $300 of your own can make you close a good trade early or hold a bad one far too long.

How should you set up a demo account?

Demo accounts often start with a balance of $10,000 or more. If you plan to deposit $500, a $10,000 demo teaches you trade sizes that your real account cannot carry.

Say you buy 0.10 lot of EUR/USD with a stop loss 30 pips away. The prices in this lesson are round and illustrative.

1. A standard lot is 100,000 units of the base currency, so 0.10 lot is 10,000 euros.
2. One pip on EUR/USD is 0.0001, so a pip is worth 10,000 × 0.0001 = $1.
3. A 30 pip stop risks 30 × $1 = $30.
4. On a $10,000 demo, $30 is 30 ÷ 10,000 = 0.3% of the balance.
5. On a $500 real account, the same $30 is 30 ÷ 500 = 6% of the balance.

Margin tells the same story. At a price of 1.10000 the trade's face value is 10,000 × 1.10000 = $11,000. With 1:100 leverage the broker holds 11,000 ÷ 100 = $110 as margin.

That $110 is 1.1% of the $10,000 demo and 22% of a $500 account. The margin calculator runs these sums for other pairs and sizes.

So set the demo balance to the amount you would really deposit, in the same currency, and pick the same leverage too.

What a live account offers depends on the broker and on where you live. A demo may let you choose more leverage than you could get for real.

A practice trade, step by step

One trade is worth doing on a demo before anything else, because it uses every part of the order ticket. Prices are round and illustrative.

1. Open a buy of 0.10 lot of EUR/USD at the ask, 1.10000.
2. Set a stop loss at 1.09700. The distance is 1.10000 − 1.09700 = 0.00300, which is 30 pips.
3. Set a take profit at 1.10600. The distance is 1.10600 − 1.10000 = 0.00600, which is 60 pips.
4. Work out the result in advance: the stop would lose 30 × $1 = $30, and the target would gain 60 × $1 = $60.
5. Find the $110 of used margin in the account panel, and watch free margin drop by that amount plus the small loss from the spread.

A buy closes at the bid, so both the stop and the target trigger when the bid price reaches them. Seeing that on a demo is cheaper than discovering it with real money.

Then repeat the trade as a sell, and again with a pending order. Try moving the stop after entry and closing half the position, so the first time you make each of these clicks costs nothing.

What should you practise on a demo?

A demo is best at teaching mechanics. Work through these until you can do them without stopping to think:

• Placing market, limit and stop orders, then editing and cancelling them.
• Setting a stop loss and take profit on every trade, and checking the distance in pips.
• Choosing a lot size from the amount of money you plan to risk.
• Reading balance, equity, used margin and free margin while a trade moves.
• Finding your trade history and exporting it.
• Watching one news release with a small position open, to see how fast prices and spreads can change.

A demo is weaker at proving that a strategy makes money. A few weeks of trades is a small sample, and a lucky run can look like skill.

The lesson on forward testing on a demo explains how to run a fairer test.

Apply the same caution to demo results shown by other people. A demo statement costs nothing to produce, so a screenshot of big demo profits proves very little about a signal seller or a paid course.

When should you move to a live account?

No set number of weeks makes someone ready, and a longer demo period does not by itself improve live results, so a checklist of skills is a better guide than a calendar.

You are probably ready for small live trades when you can place every order type without errors and size each trade from a fixed risk.

You should also have followed a written plan for a set run of trades, say 30, even if the results were mixed.

When you switch, the smallest size your broker allows keeps mistakes cheap. That is often 0.01 lot, where a pip on EUR/USD is worth 1,000 × 0.0001 = $0.10.

The aim of the first live weeks is to notice how differently you behave when the money is real.

You can keep the demo open after going live, to try a new idea or a platform feature before using it for real.

Whether trading can ever replace a salary is a separate question, covered in the next lesson, can you get rich trading forex.