Most online retail forex brokers will offer two main types of trading accounts to their forex trading customers: live and demo accounts.

Each of these account types will be explained in the sections below. Also, possible causes for differences observed in a trader's performance seen between demo and live trading will be discussed.

Practice Forex Trading Accounts

Practice or demo accounts, on the other hand, consist of simulated trading accounts where no actual money is placed at risk. Also, trades can be initiated and liquidated, but no real funds are actually exchanged.

Forex brokers typically offer demo accounts in the hope of attracting more business. From a trader's perspective, demo accounts allow traders to practice trading while not actually producing any tangible results in terms of actual profits or losses.

Overall, such practice accounts can offer trading novices a great way to learn about how to trade forex, as long as they do their best to avoid trading errors that might allow them to develop poor habits.

Demo accounts can also provide an opportunity for any trader to test out the broker's services, as well as their own trading plans or strategies.

Finally, trading in a demo account can also give traders a good look into the broker's trading platform to see if it meets all of their requirements before they send any money to open up a live account.

Actual Forex Trading Accounts

Actual or live accounts consist of funded trading accounts where actual forex trading takes place and real money is placed at risk.

Most forex brokers offer a range of live accounts with the smallest accounts being micro or mini accounts that can often be opened with initial deposits of under $100. They tend to come with minimal services and often have smaller minimum dealing amounts or lot sizes.

Larger live trading accounts usually include Standard and VIP accounts. These accounts generally require higher initial deposits, tend to come with more services and may have larger trading lot sizes.

Demo Trading Success May Not Indicate Live Trading Success

The lack of actual money being placed at risk in demo accounts can result in significant differences between the performances achieved by forex traders in demo trading and live trading environments.

Such a variation can come from pricing or order execution differences on the part of the forex broker, as well as a platform switch or performance change.

In addition, they might arise as a result of a different set of emotional responses on the part of the trader when nothing is at stake versus when they have substantial amounts of money on the line.

Irrespective of the source of the potential performance difference, it will need to be taken into account when traders are either learning how to trade forex or are evaluating trading plans and strategies.

Using a Micro Account Instead of a Demo Account

Many experienced traders concerned about this possible performance difference situation may elect to open a micro or mini account with a broker rather than use a demo account.

This will allow them to see what kind of performance they can reasonably expect based on the real pricing and services that the broker offers - all without putting a lot of money at stake on the experiment.

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.