There arenâ€™t many ways to invest which offer you an opportunity to try it out for free. You canâ€™t own property in a virtual world and see what happens. You canâ€™t use virtual cash to open a savings account and watch what happens when the interest rates fall. The stock exchange doesnâ€™t give you the opportunity to practice buying and selling shares. CFD trading, however, is slightly different. Many top rated CFD brokers allow you to open a CFD demo account and trade in an almost lifelike environment with a pot of virtual cash. CFD trading demo accounts have a mixed reputation. There are traders who shout the value from the rooftops, and others who say they are a complete waste of time. We intend to look at both sides of the debate and give you a more balanced picture. Then itâ€™ll be up to you to decide whether to open a CFD demo trading account or start trading straight away with real money. Weâ€™ll start by giving you a list of some of the advantages and then look at each one in more detail. Before moving on to some of the reasons why a CFD trading account is not considered such a good idea. Why a CFD demo account can be considered an essential tool for the beginner:
- You are trading with paper money (virtual cash), rather than your own hard-earned cash
- You will get an opportunity to test your broker
- You are able to learn and understand the intricacies of a trading platform
- You can gain valuable experience about various markets and specific instruments
- You will be able to develop your trading style and perfect a strategy to match it
What are the advantages of trading with paper money?
When you open a CFD trading demo account you arenâ€™t putting your hard-earned cash at risk. Sounds a pretty good reason to open a CFD trading demo account. You will also be able to practice any strategy you feel like trying. Which means money management techniques, trading strategies, position building and profit taking methods. There is a downside to this, however. Itâ€™s very easy to lose a sense of reality with a CFD demo trading account because the psychological stress just isnâ€™t there. When you trade with real money itâ€™s your own cash that is on the line, which is bound to make a difference to your trading decisions. Opening a CFD trading demo account is no real preparation for the sensation of risking your own cash. No matter how hard you try to overcome it.
Opening a CFD demo account gives you an opportunity to get to know your broker
Finding the best CFD broker to work with is possibly one of the most important decisions youâ€™ll have to make. Unfortunately, it is one which is very rarely given the time and attention it deserves. What should you look for in a CFD trading provider? Value for money is one consideration, but you also want a broker who will help you every step of the way. From the very beginning when you open a CFD demo trading account right through to when you start trading with real money and beyond. Getting the relevant information about a broker isnâ€™t always easy. Yes, there are plenty of online broker reviews, customer comments, and trading articles. But nothing matches the value of first-hand experience. And you can get this by opening a CFD trading demo account. By opening a CFD demo account you can see the type of pricing a broker is offering and how this is affected by trading hours and news releases. We should point out, however, that pricing may mirror a real account but order execution is generally different. The quality of order fills is not possible to simulate when you arenâ€™t trading in a real, competitive market. Letâ€™s give an example. Say you want to open a 1000 lot position at the price shown. Itâ€™s possible in a virtual trading world but a live account will be subject to price averaging. This is because the order will be filled according to what prices and volumes are available in the market.
Top 3 CFD Trading Brokers
CFD demo accounts give you the opportunity to test out trading platforms
There are three different types of trading platform used by CFD brokers:
- Universal platforms for example MetaTrader 4 or MetaTrader 5
- Mobile trading platforms
- Proprietary platforms
In the very beginning, youâ€™ll be better off choosing a broker offering a universal platform such as MT4. Simply because itâ€™s very user-friendly and should you want to change brokers there will be no need to worry about understanding a new platform. MT4 and MT5 are also considered to be the industry standard and many proprietary platforms are similar for this reason. Itâ€™ll be useful to find your way around a mobile platform as it makes for a great addition to your trading toolbox. Getting to know mobile platforms will serve you well and save you time in the future. Opening a demo account also gives you the opportunity to test out various proprietary platforms. Some of which are better than the standard and some most definitely arenâ€™t.
A demo account will give you valuable trading experience
There are a lot of things you can learn by spending some time trading CFDs or Forex with a demo account. Not just trading techniques, but youâ€™ll also be paying more attention to the markets and gaining a better understanding of how they work. An experienced trader will have spent time gaining such knowledge and be conscious of the fact that every asset has its own peculiarities and its own â€œpersonalityâ€. So what can you learn about? The usual daily schedules of the markets and the different market centers. Youâ€™ll get to appreciate which news releases affect certain assets and markets. For example the release of employment figures, the release of GDP figures, and decisions the central banks make. With a demo account, you can afford to make trading mistakes and learn how to avoid them when you are trading for real. We should, however, stress you must use your demo account as seriously as possible and imitate real situations as much as possible.
Using a CFD demo trading account allows you to develop a style and find the right strategy
Weâ€™ve already mentioned some of the most common trading strategies used in CFD trading, but this was just the tip of the iceberg. There are an infinite number of ways you can play the markets, and it would be very unusual to find the right one straight away. A CFD trading demo account is the best way to start looking. Are you better suited to be a day trader? Are you the type of person better at swing trading? Are you confident you can deal with the stress of scalping? It would be advisable to try out a few different trading styles before you commit to one in particular. But bear in mind that a few CFD brokers apply a time limit to their demo accounts, for example, 30 days. There are, however, a number of brokers that apply no specific time limit, and you can use one for as long as you like.
What are the disadvantages of using a CFD demo trading account?
Thereâ€™s no denying demo accounts can be a valuable tool to have at your disposal. Especially at the beginning of your trading journey. There are, however, a few disadvantages and itâ€™s time to fill you in.
Virtual trading accounts arenâ€™t an exact copy of the real thing
This is possibly one of the major disadvantages of trading with a CFD demo account. The trading environment isnâ€™t real. The conditions arenâ€™t real. The money youâ€™ll be using for trading isnâ€™t real either. Add these three things together and your experience becomes a little detached from reality. Trading is a bit of a roller coaster ride. There are stupendous highs but also some abysmal lows and youâ€™ll never be able to replicate that in a virtual environment.
Demo traders have a tendency to be complacent
This is something youâ€™d have to work hard at to reverse. What are you going to do when the money youâ€™re investing isnâ€™t real? You might find yourself making bigger risks and making trades you wouldnâ€™t dream of making in the real world.
Some of the elements are missing
There are some things you will encounter in the real world that arenâ€™t possible to replicate in the demo arena. Slippage is just one example. Which means a demo account for trading CFDs is not a true reflection of a real money trading platform. In the real world, you might encounter lag time, latency and a number of other differing factors.
Is there a sensible alternative to opening a demo account for CFD trading?
Because of the various disadvantages, you might be wondering whether there is a better option. Yes, there is. And itâ€™s to open a micro account and fund it using your own money. Thereby simulating real trading but with a very small deposit size. In other words, you are lowering any associated risk. All of which makes it the perfect cost effective way to get your introduction. Put yourself in the following situation. You have $2,000 you are planning to invest in CFD trading. Are you going to open a trading demo account using paper money, and potentially have as much as $100,000 to pretend to invest? Or would it be better to open a micro account that only requires a minimum deposit of $100 and enjoy trading under real market conditions? Conditions in which you get to enjoy the thrill of trading because youâ€™re doing it with your own money. Which one is entirely your decision.
Can a CFD trading demo account help with the psychology of trading?
Ask any experienced trader and they will tell you CFD trading is not a walk in the park. Neither is it an occupation for the faint hearted. Weâ€™ve already mentioned it can be a bit of a roller coaster. When you make a winning trade youâ€™ll feel on top of the world. But hit a low and youâ€™ll be feeling confused, angry, sad, or any of a number of negative feelings. This is what can sometimes make common sense fly out of the window. Thereby resulting in stupid decisions and opening more bad trades. The emotional side of market trading can be a very difficult one to overcome. But it is one aspect you will need to take control of. After all, human emotion is a powerful thing. You need to work at having a strong mental attitude, at least in respect of your trading. There are a number of risk management techniques that can relieve some of the pressure. Adopting them will mean the losses when they occur, are kept to a minimum and are ones you can afford to take. This is the psychology of trading and one thing you can try to get to grips with when using a CFD demo trading account. There is one more thing you can get to grips with by using a demo account for trading.
With a demo account, you can learn how to manage account size
Also known as risk management strategy it is knowing how much you can afford to lose without it crippling you. You have to face it there will be the inevitable losing trades and it would be better if they donâ€™t blow out your account. Because that will be your trading career over. Letâ€™s see if we can elaborate with an example. You open a trading account and deposit $1,000. You decide to open a trade that requires a margin of $200. Should the trade be a losing one your trading account will be down 20%. Many more of this type of loss and your account will be reduced even further. Say you make two further losses of about the same size. Your account will be reduced by another 40%. This means you have to make a profit of 150% to get things in your account back to normal. It is possible to reduce the risk by only committing $50 into a trade. Three trades of the same level will mean your account is only down $150. Which means you only need 17.6% profit to get back to where you started. Deciding which route to take is called account size management. In the first example, a lot of risk was used to try and make a big profit. The second example, on the other hand, was recognition of the fact it is just as important to stay alive as it is to make money.
Doing well in your demo account doesnâ€™t automatically translate to success in the real arena
So youâ€™ve made huge amounts of profit in the virtual world and are ready to rock it into the live arena. What a minute before you jump in because being a successful virtual trader doesnâ€™t automatically mean you will be just as good with your own money. This tends to be because youâ€™ll have a different mindset when trading with your own cash. There are, however, a number of other differences which have the potential to affect your performance. These can be split into two categories.
Trader related differences – There is little emotional commitment when trading with paper money. You may be tempted to stray from your trading plan as there are no real consequences to such an action. And could also result in you developing discipline related bad habits. You may also be tempted to overtrade or fail to evaluate the risk sufficiently, leading to very negative consequences when you eventually move over to live trading.
Execution-related differences – Prices in lives trading are subject to requotes, but this rarely happens in a demo situation. It is often the case that price feeds and dealing spreads are different in demo trading. When executing demo stop loss orders a broker will probably do it very accurately. However, there may be considerable slippage in a live trading environment. It doesnâ€™t happen very often but brokers have been known to make mistakes in a real trading environment. Trying to resolve them can be very costly, both in time, effort and money. We have found, on a few occasions, a broker not offering their real trading platform for demo account holders. Which means you will have to learn and become accustomed to the new trading platform when changing over to live trading.
So, there you have it. Both sides of the argument pertaining to using a demo account for trading. As you are now aware there are both good and bad points you need to consider. How you weigh them up against each other is entirely up to you. Whatever you decide, we hope you have fun doing it.