Having decided to try your hand at trading on the forex markets, the best way to get a feel for real trading, is by opening a demo account with one or more of the major brokerage houses. Demo accounts allow you to experience real forex market conditions, and use real trading systems to make practice trades without risking any money.
Signing up for a demo account can be easily done on the internet. Most accounts are then funded with virtual money, and are available for the investor to start trading immediately. Because the forex demo accounts use real systems and prices, they are the best risk free way of getting actual forex trading experience.
The two main ways of trading using a demo account, are dealing at live prices, or trading via orders. This article focuses on the latter.
Orders play a very important role in in forex markets. One of the main advantages of orders, is that they are less labour intensive than trading live prices. Rather than sit and stare at the screen till a currency pair reaches the desired price before trading, a forex investor can place an order that is filled if the currency ever reaches that price.
The first kind of order is the limit order. It must be placed at a price more favourable than that available on the market presently. The example below illustrates this.
Assume the US$ is trading at $1.9 to the £. An investor might think that this is too expensive. He may only want to buy $ when they are trading at $2/£. In this case, he would place an order to buy a fixed quantity of dollars when this price is reached. If the price does swing, and move to $2/£, the systems try and fill the order.
It is important to note that open orders can and will be filled at all hours of the day. The investor does not even have to be logged on, or sitting in front of his computer for an order placed to be filled. It is filled when the conditions set are met. This is especially advantageous for currency investors who have other time commitments and cannot be in front of the computers constantly.
Another popular type of order available to investors is the stop-loss orders. Stop loss orders are placed on forex positions that the trader already has open. Assume the trader above bought US$ at $2/£. He can place a stop-loss order that triggers a sale should their price fall, to say $2.10/£. In this way, he limits his potential loss.
Similar to the stop-loss order, is the take-profit order. In fact it is the direct opposite. These orders are placed on any open position, and are triggered when a set profit level is reached. Assuming that an investor bought US$ at $2 to the £, he can place a take profit order to capture his profits should the price rise to £1.9 per pound. Buy $100 for £50 at $2/£1. Sell $100 for £52.63 at $1.9/£1. Profit £2.63 or 5.2% in one trade.
The final form of order is the contingent order. This is actually just a lot of orders combined into one. They are sometimes referred to as if/then orders. For example, you can place an limit order for a particular currency order. If that is filled, this would simultaneously trigger a stop-loss order, and/or a take-profit order being placed. In theory therefore, you could earn money while you sleep.
So sign up for a demo account, and get your feet wet in the forex markets without risking any real money.
One point to note is that not all the order types are available on online forex accounts, demo or otherwise. It is therefore wise to investigate what a particular forex brokerage house’s platform offers before committing. Advertising claims aside, using forex demo accounts to try out their features is the best way to confirm the specific features offered by a forex brokerage account.