Advantages and disadvantages of paper trading

When people start to look at spread betting seriously and think they might like to have a go, it can be a very good idea to open an account with a spread trading company who will allow you to run a demo account for a while, otherwise known as ‘paper trading’.

Paper trading means that you can place spread bets using all the figures of the real market but without using real money. The demo account will monitor your trades just as though they were real ones and show you at the expiry date whether you made money or would have made a loss – all without investing a penny.

This helps you to learn how to use the account, how the mechanics of spread trading work and to test your knowledge of the market you have decided to trade in, but there can be disadvantages to paper trading as well.

Occasionally, it can mean that when you come to invest real money you can feel a false sense of security. When you use ‘pretend money’ or figures, there is not the same sense of emotional attachment and so it allows you to become willing to take on a higher level of risk. For instance, when paper trading; you might decide to place a trade for £500 when in real life you might only invest £50. If you were to make a profit, your profit may then show higher than you might have done in real life.

When you change to real money, you may just find it feels different, your level of tolerance to risk is lower and your system might not be as successful. It is definitely an excellent idea to use a demo account for a few weeks, especially if you are a novice, but be sure that you don’t shift to real money just because you haven’t the patience to run the demo account any longer and that the spread betting strategy you choose to use is right for your real life budget.