Spread Betting: Disadvantages of Demo Accounts
When it comes to trying out a spread betting strategy or a new trading style for the first time, conventional wisdom suggests it is worthwhile to start off trading with a demo account, to allow you to find your feet in a safe, risk-free environment. Those that jump straight in at the deep end and place their first cash trade with no prior experience tend to find themselves losing money like water, simply as a result of inexperience and trading naivety, and so the benefits of trading in a sandbox first of all are well founded and commonly advised to new trader across different trading markets.
But it's not all sunshine and roses when it comes to demo trading accounts. Unfortunately, while spread betting demo accounts do check some boxes as far as getting a feel for the setup is concerned, their impact on trading strategy and style is actually much less than it could be, for a number of key reasons. As such, it can often be disadvantageous to trade purely out of demo accounts, even if you are a complete novice to the trading game.
Demo Accounts: Fact vs Fiction
The main, fundamental problem that comes with demo accounts is that they don't trade real money. You could be forgiven for thinking at this stage that that's pretty much the whole point of demo trading - after all, isn't the key advantage of demo trading the lack of risk? While that is certainly the case, there are other, better ways to achieve the same end that allow for a more realistic trading experience, and give a more accurate reflection of how you're likely to fare later down the line.
Because demo spread betting accounts don't trade real cash, there is an artificial separation between the trader and his positions. You don't get to rationalise in real money - there's no impetus to cut your losses and run on with your profits, nor is there any means of truly highlighting the riskier strategies from those that are more cautious. With a demo account, there's no real accountability, which can and does hamper the trading experience.
Trading with a demo account is emotionless. If a position goes well, or if you lose all your trading capital, who really cares? There are no consequences for your actions, which encourages unrealistic risk taking and foolish trading, and you're hardly likely to learn from your mistakes if there's no disincentive to trade in a particular way.
In addition to these difficulties of psychology, demo accounts are also often inherently limited, either in functionality or in the markets they present. Often, market data is delayed as it is fed through the demo trading platforms, in order to encourage traders to sign up for the live version - this eliminates much of the subtleties off of trading from news announcements and market goings on, and makes it virtually impossible to learn the ropes as a fully rounded, accomplished trader.
So what can be done about the limitations of demo accounts, without jumping in to the markets blind?
Trading Account: The Solution
One alternative to trading demo accounts that most traders find helpful is to actually start trading for real, albeit with microscopic transaction sizes. There are many brokers who, understanding the limitations of demo trading, offer their clients the ability to place smaller trades, some from as little as 10p a point. While this isn't going to make or lose you fortunes, it's still real money you're playing with - the difference between this trading setup and a demo account is like night and day.
While demo accounts are no question a highly useful tool, it is important that traders quickly come to terms with their limitations, and understand that the psychological and experience elements of trading are crucial to long-term success. While you might find the demo functionality appealing as a risk free insight into what you can expect when you trade for real, there's no substitute for coal-face trading experience, even at ultra-modest levels, as far as learning to trade effectively is concerned.