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A forex trading contest is exactly what you would expect it to be – a contest amongst forex traders to see who can make the most profit over a certain amount of time.

In most contests, everyone starts with the same parameters: same starting capital, same length of time, same leverage options, same platform, etc. Aside from that, it’s just like demo trading. You trade using the sponsoring broker’s platform with live price feeds. The only major difference is that there’s the added pressure of trying to beat other traders.

The great thing about partaking in forex contests is that they give you the opportunity to win capital for your account. At the same time, you can gain valuable live trading experience for little or no cost at all.

Sounds like a great deal right?

Well, just know that it ain’t all sugar, spice, and everything nice!

One thing you should note about forex contests is that they really test the limits of your risk management rules. Because of your desire to win the contest–and the fact you are playing on demo–you may take risks that you wouldn’t take on your own live account. What is to stop a player from “betting the farm” on each trade? You’re not going to lose real money by doing so and you’ll only lose the game.

This is the reason why we may see contests where winners gained something insane like 200% in one month. Not to say this is totally ridiculous in the real world, but highly unlikely and unsustainable without huge risks of quickly blowing out an account. Putting big bets on a single trade is something you probably wouldn’t do with your own real money on the line, right?

Now, I’m not saying forex contests are bad. I am just cautioning you that, if you aren’t careful, they could end up being counterproductive to your forex education. Know the difference and be able to separate your approach to live vs. contest trading.

Of course, you have to understand that brokers don’t just hold these contests for the sake of throwing money at clients and potential clients. They offer these opportunities to give users a chance to become more familiar with their trading platforms. As more users jump on the bandwagon, their products gain in popularity.

Furthermore, keep in mind that winning these competitions sometimes comes with hitches and loopholes. For example, in some contests, the prize money only comes to you in the form of a trading account. For others, you might only be able access this additional capital if you put up some of your own money.

So there, you’ve been enlightened.

If stiff competition is your thing and you do decide to join a contest, there are plenty of options out there for you to choose from.

For instance, Interbank FX regularly arranges competitions for its live traders. Those who register for the Interbank FX Mini Challenge battle for a chance to win up to $3,000 monthly.

FXCM holds a popular automated trading challenge for those of you interested in mechanical systems. The current contest is just about to wrap up, but you can start preparing for the 2011 edition, which will offer a total of $100,000 in prizes.

Now, if you’re uncomfortable with the idea of competing against strangers, you may want to check out Oanda’s FXContest, which allows you to create your very own contest for you and your friends.

With so many different kinds of contests out there, each with its own appealing prize, I can understand how one would be inclined to join the fray. But before you do so, keep in mind the advantages and disadvantages of forex contests. Remember, there’s nothing wrong with a little competition just as long as it leads to good trading experiences and discipline.