Traders that are looking to venture into the CFD and Spread Betting world are often advised to start with a Demo account before making a real money deposit with a broker to start trading. But what is a Demo account, exactly? The main thing to remember when using a Demo trading account for the first time is that you are experiencing the market as it really exists. All of the same trading instruments and asset types are made available. You will be using the exact same trading platform and you will be watching charting and price activity that mirrors what is being seen by traders with “Live” or “real money” accounts.
The only difference is that you will be using “virtual money,” which essentially means that trades will have no real monetary value, whether your trades are successful or unsuccessful. With a Demo account, you will have no financial risks. At the same time, you will not be able to make any financial gains with this “virtual money.” So, if there is no way to profit monetarily, why would traders spend the time and effort using an account of this type?
Testing the Platform
Trading platforms can appear intimidating and complicated when they are first put to use. This is especially true for traders that have no experience with the platforms that are offered by other broker companies. Once you have seen a few of these platforms, you will start to notice some similarities but even in these cases, it is still a good idea to use a Demo account so that you can become familiar with all of the platform features and get some practice placing some trades under live market conditions.
These practice runs will help to prevent trading mistakes in the future. All traders with any experience have clicked the BUY or SELL button incorrectly, and this is even more likely to occur with traders using short term strategies. Becoming familiar with the platform before “real money” trades are placed can help to reduce these mistakes and help to lower some of the costs that are associated with being unfamiliar with the trading platform.
Getting Experience with Live Trading Conditions
No matter what trading strategy you employ (whether it is based on technical or fundamental analysis), all traders can benefit from simply watching how the market reacts under certain conditions. Since these conditions are constantly changing it is very difficult to create a “trading simulator” that can provide accurate lessons for new traders. This is the reason trading brokers simply allow Demo accounts to use real price feeds and charting software. These early lessons can prove highly valuable as one of the biggest jobs that a trader has is to understand how the market behaves and to make probability forecasts about what is likely to come next.
Developing and Testing Your Strategies
This last benefit is mostly directed toward new traders that have not yet seen their trading strategies at work in the market. But experienced traders can benefit from this as well. Specifically, what we are talking about is the ability to test and develop a new trading strategy without risking your hard earned money to do it. If a trader uses a demo account, it can be an excellent way to test your ideas to see if they can actually be profitable. Even though you will not be able to actually “profit” from these trades, your main goal will be to eliminate any potential risk when you are using a trading strategy that you have never actually tried before.
For all of these reasons, traders are encourage to open a Demo account if you are a new trader, if you are switching to a new broker platform, or if you are looking to implement a new trading strategy. In all of these cases, there is some possibility of error and gaining familiarity with a Demo account is the best way of removing any chance that real money will be lost unnecessarily.