Lately, I'm hearing a lot of comments and fanfare in the media about firms which offer spread betting demo accounts and wanted to share my views on trading simulators - please feel free to comment with your own (constructive of course) comments. This doesn't apply just to spread betting but to any type of trading for all it matters (forex trading, futures trading...etc - where there is a considerable degree of risk).
To me demo accounts are the devil incarnate and lead the newbie to the false impression that trading is easy.
Let me explain why.
On a demo account you never suffer from slippage or poor stop hits. On a demo account you never really have anything to lose - its always risk-free.
The no risk factor is the most important. No matter how seriously you take your demo account it will never affect the amount of money in your pocket.
With a demo account your brain processes the information differently - it sees the big winners and ignores the losses and small winners. Your brain tells you - if I can get big winners on here then I can get it on a real account.
Of course this is far from reality. Your brain knows the difference even if you try to convince it that its the same.
The first time you place a trade - even for a mini lot, a whole different set of connections open in your brain. You have the anxiety at the beginning of a trade - fears as price does its little dance and fears that your gains will run away.
When I started I had two demo accounts and I did very well with them. However, I couldn't make it work with real cash. I find that you approach trading very differently when it's your actual 'hard earned' on-the-line.
Well, I am not going to harp on about this - but you know the story.
Let me tell you what demo accounts are good for.
1) trying out a trading platform (which is not always good as live accounts often don't act the same).
2) system testing.
and that's it.
Paper trading eliminates emotion. To ease into real trading, keep your position sizes as small as is workably possible. As a simple example, if there's $20 at stake, it's easy to make the right decisions, and then sleep easily at night. If there's $2,000 at stake, it's extremely difficult. To put it another way, if you are becoming too emotionally involved in your trades, then your position sizes are too large.
Successful day traders have incredible discipline and nerve. As long as trading remains a "hobby" (as opposed to a primary income source), there's no pressure to trade at a level necessary to put food on the table, so you can focus on trading your plan, and percentages instead of dollars. A 2% win is still a 2% win, whether it's $20 or $2,000. Your position sizes should be commensurate to your account size, whose growth should ideally keep pace with your confidence and experience.
My recommendations for the newbie would be as follows:
3) Trade a demo account to grasp the basics of trading and then go live - preferably within 2 months of starting.
4) Open an account with a broker that allows you to spread bet small stakes like Ayondo for example - there you can trade from as low as 1 GBP - but don't go that low. You will not make a lot of money but enough to help you feel something of what its like to really trade.
5) You might also lose some money...try out different systems, read stuff but keep spread trading...
6) Lose some more money...
7) Suddenly realize that its possible to blow your account just with £1 a tick.
8) Now open a new demo account and start to work on your own system.
9) You must trade any system to the letter or the testing is worthless.
10) When your system has made 3000 pips you may transfer to live again but still at small stakes.
11) When the system trading live has made 3000 pips you may spread bet £10 stakes.
and so on until you reach your desired level.
That's my best advice after several years spread betting.
I've noticed this and would welcome your feedback. I once worked with someone who said they would never trade live till his system worked - well he traded demo for 2 years and built a fair system that made money.
He then went live and blew the account.
Why?
Because although he was by that time a pretty good demo trader he could not trade live for toffee. The connections in his head had not been made in the real world and as such he had not evolved the emotional control that any trader needs. In effect he was a total newbie again.
This story is true and its not the first time ive seen it. This particular bloke took a further 2 years of live trading until he was in the same position again. and then he gave up (like so many do). Think on before you use a demo ....
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