Demo and practice accounts are useful for starting out (both Capital Spreads and Spread Co offer demo accounts) and to learn about the platform workings however beware that investor behaviour tends to be different when you are trading with real monies. This is all about trading psychology.
Paper trading and demo account are a good idea for those starting out but keep in mind that they have a built-in flaw. Real-life trading is far more complicated and stokes the emotional fires.
“According to Manoj Ladwa, a senior trader at ETX Capital. These products increase market knowledge through our commitment to education. Clients can go long or short and trade all manner of markets through one account, such as shares, foreign exchange, commodities and options.”
In addition trading when trading with a demo account you are much more inclined to raise your stakes as you increase the value of your account, and the more profitable your trades the greater risk you can take. So is demo trading useless? No, paper trading or trading with a demo account does help. For one it is very easy to make expensive mistakes when you do not know how to use the trading platform. But more importantly it tells you whether the technical analysis or strategy works in theory. I’m sure all the well known traders of the past tested their macd’s or stochastics to get and idea of its viability. They would never have gone straight in to the cash markets without assessing their indicators with back testing and forward testing. O’Shaughnessy back tested 45 years worth of data & strategies before coming to his conclusion and making his fortune. Zweig tested years worth of monetary data before coming up with his system for calling market tops and bottoms. O’Neil (CANSLIM) did similar. I also think most approach dummy account wrong. Its not so much that its different to trading real money. Its more about telling you “if you can’t win on a dummy account there is no way on this earth that you will win with real money”. That’s the first free lesson to be learnt. So try a dummy account and find out if you are using a time frame and strategy that is right for you…
“With the demo account you can practice without risking any real money. All the prices reflect the live markets and as it is not time limited you can use it as long as you need to.”
So first we find a strategy with a proven edge – then we set about finding the least emotional and time consuming way to trade it. The problem is that when you trading with demo funds it doesn’t matter to you if you go long or short and you don’t really care whether the market goes up or down. So you are more relaxed when trading with dummy funds which tends to help you increase your performance. When hard money is on the line, it is different because you tend to be much more careful.
Thus, if you are serious it is better to trade with real money while starting small and employing risk management tools to reduce your risks. Even if you spread bet with small £1 bets, at least that way it’s still real money. If you are new to spread betting you might want to give IG Index’s TradeSense a go as it gives new clients the possibility to place reduced bet sizes. And you’re much better off using small amounts of real money to practice than a demo account IMO as you’ll probably take it more seriously. I believe you can do 10p a bet on TradeSense for the first two weeks which really limits losses to a small amount while you’re getting used to it; and it then goes to 20p per point for the next two weeks, and 50p per point after that. This way, even should the FTSE 100 index go 100 points against you, at 10p a point your loss ‘only’ amounts to £10. Also, IG will answer the phone 24/7 with any questions and they have an 020 number you can call with mobile inclusive minutes. All adds to the package, plus you get advanced charts etc, and their prices, as they would need to be, are far more reliable than ADVFN monitors which I find fairly temperamental.
Note: Spread betting with small stakes also has limitations and you can easily end up overtrading which is wrong, for health, and wealth wise. Also, how much pressure from £1pp? It won’t impact you if you are just trading a mechanical system since trading at £100pp or £1pp is exactly the same ignoring slippage/liquidity but if the “system” involves a lot more judgement (as it usually does when day trading stocks) then the results you might get from spread betting at £1pp are not indicative of £10pp or £100pp. Somebody could be brilliant trading 10pp but crap at 1pp. All depends. Of course I agree with the idea of starting small and working up but do keep in mind the limitations. So try raising the stakes slowly but steadily.
P.S.: It is absolutely crucial to understand the risk parameters before trading. More generally, you should always try to have a good understanding of any trading or investment product, and how it can move, before you even consider making a real money trading. Putting real money at risk can accelerate the learning curve – yes – but it can also prove an expensive exercise. If you can, it is better to learn first with a small amount of funds and use that knowledge as a path to earn good profits.
“Demo trading naturally also tends to give you the best prices and the cleanest profits. The markets give you the exact opposite most of the time. Were you supposed to learn how to read before going to school? Trading in small sizes is the key to learning and gaining the right kind of experience. The last thing we want is to see people swimming in a pool of sharks with no life preserver.”