Because forex (FX) is a decentralized market in which dealers disseminate their own price feeds through their trading platforms, it is crucial to learn the features and how to use the platform you will be trading on. Fortunately, FX traders can test out each platform using a demo account, which means no real money is at risk.
Reputable FX brokers allows potential customers to download a free demo version of their software. This is critical if the customer is to become acquainted with the platform's layout and use it to trade. Here we'll discuss the importance of demo trading and let you know what you should look for when trying different platforms.
Each Platform Is Different
Several platforms are commonly offered by many brokers. Common platforms include MetaTrader 4 and 5, also called MT4 and MT5. In addition to these platforms most brokers offer additional platforms, although these additional options may be proprietary to the broker. This means that platform may not be available from other brokers.
While each platform may function and look slightly different, most provide roughly the same features. These features include forex quotes/prices, charts, technical analysis tools, news feeds, trade history, drawing tools, and functionality for buying and selling currencies.
Some platforms have more features than others. For example, some platforms have integrated fundamental and economic analysis tools, while others do not. For a trader taking long-term trades this may be important, but for a short-term trader it isn't.
The image below is a snapshot of the MT4 platform.
Along the top of the platform are shortcuts to various tools and settings. Below this is a charting window to see the price history of a currency pair or other asset. Below the chart is the terminal. There are multiple tabs in the terminal, providing access to news, account history, current trades, and other information. As mentioned, not every platform is set up this way, but most offer the same features just arranged in a different way.
It's a good idea to place at least 50 demo trades on each platform before trading actual money, just so you can master the specifics of order entry on each platform. A trader should never trade live unless he or she can confidently answer all of the following questions:
- How do I place a limit order?
- How do I set a stop order?
- Can I set a limit and a stop at the time of entry?
- Are the spreads on the platform fixed or variable? And what is the typical spread?
- What is the lot size that I can trade (1,000 units, 10,000 units, 100,000 units)?
- Can I mix and match the lot sizes?
- Can I call the dealing room directly if my internet connection goes down?
Some platforms use pop-up order windows, while others allow you trade by clicking prices directly on a chart. Typically, to buy a currency pair, click on the offer part of the quote (the ask), and to sell, you click on the bid part. Some platforms allow you to choose market order or limit order after the quote window pops up, while others force you to make your selection beforehand.
Here is a sample order screen in MT4. To bring up a detailed order screen like this, in most trading platforms you can right-click on a chart or quote and select new order or new trade.
On the left is a very short-term chart of the currency pair the trade will take place in. This currency pair is also listed at the top of the trade box. Next, input the volume you want to trade. Enter a stop loss and take profit level for the trade. The trade type can be a market order or a pending order. If you want to buy/sell at the current price choose market as the type. If you want to buy or sell at a different price, choose pending.
With a pending order there are more options, as you need to input the price you want to buy or sell at. You may also choose to put an expiry on the order. Once everything is filled out, place the order.
One function that most new FX traders overlook is tax reporting. Because FX is a global, unregulated market, dealers as a general rule do not provide any documentation to the tax authorities in the trader's country of residence. Tax reporting is solely the responsibility of the trader. Brokers simply produce detailed transaction histories, in an electronic format, from which the trader must then compile their own tax reports. Such an arrangement clearly calls for a trading platform with highly organized and flexible reporting functions.
But reporting quality varies greatly from dealer to dealer. All dealers will provide you with a full transaction report, but how those transactions are laid out could mean the difference between spending hours reconciling trades, or taking one minute to print out a final report to present to your accountant. Some FX traders may generate thousands of trades in a year. A platform that reconciles all those trades into an easy-to-understand, end-of-year income statement, breaking down all profits and expenses, is invaluable.
Tax treatment of currency trading is very much dependent on the individual's tax status. Most dealers will not advise you regarding tax matters, nor should you take their advice if they do, because they lack the expertise to deal with the multitude of tax authorities around the world. You should always consult with a tax professional before choosing a course of action.
As a general rule, the easier a platform is to understand and the more organized the reporting of trade history is, the better. After having dome some demo trading, look through the trade history and account statements to see how easy it would be to see your profits and losses for the year.
Trade Like It's Real
Once you have mastered the basic functionality of a trading platform, use the demo platform to experiment with various strategies. Are you a short-term momentum trader who likes high leverage and tries to capture 10 to 20 pip moves? Or do you prefer using less leverage and holding longer-term positions that could potentially yield hundreds of pips? Demo trading can help you discover what type of trading suits you best.
However, demo trading is not the real thing, even though it helps prepare you for the real thing. You may be perfectly calm after sustaining a big loss in a demo account, but might become completely unhinged over even a small loss in your real account. To make demo trading as productive as possible, you need to trade the demo account as though the money were real. For example, if you plan on funding your real account with $5,000, don't trade a demo account that has $100,000.
The demo account should mirror your real situation as much as possible. Pretend the money is real, and don't do things you wouldn't do with real money.
The Bottom Line
Even after you decide to trade live, demo trading can be very valuable. Many successful traders will test strategies in a practice account before they try them out with real money. Although demo trading will not guarantee you profits in real life, many traders agree that if you cannot first achieve success in a demo, you are almost certain to fail in your live account. This is why demo trading is vital to the growth and development of FX traders.