A crypto demo account is a trading account which has most of the elements of a real account, with the key difference being that it contains virtual funds and not real money. The trading conditions are also simulated. The cryptocurrency demo account is therefore designed to be a learning tool which should be used as a test-platform to gain practical trading experience before trading with real money.
Why is a demo account necessary?
- You get to learn and practice the steps that are necessary in setting up a trade, from setting order parameters to final trade execution.
- A crypto demo account is the next logical step from theory to practical experience as far as trading is concerned.
- You can use a demo account to gain familiarity with the trading platform and the trading process, as well as understanding the nature of all cryptocurrencies listed.
If there is any form of investment or financial trading where the trader should get a taste of what to expect in the real money market, it is cryptocurrency CFD trading. If you thought forex was the ultimate in terms of volatility and risk, think again. Cryptocurrencies, especially Bitcoin, are very volatile and moves of up to $600 in a single trading day can never be ruled out. A look at the BTC/USD chart below shows exactly what traders have to confront in terms of price movements.
Any trader that is unfamiliar with the trading of cryptocurrencies on CFD platforms will get a rude awakening. Many traders who were unaware of the potential for two-sided movements and bought into a lot of the hype of late 2017 have all lost their fingers after having them badly burned. A little demo trading to understand the dynamics of the crypto market could have saved them “many coins” (to borrow a quote from the “Richest Man in Babylon).
What approach should you use?
Here is how to trade cryptocurrencies on a demo account.
Set the virtual funds in your demo account to the same as what you will use for a real account. This means that you should ideally use $1000 for demo trading if you intend to trade live with $1,000. It is unwise to trade with $100,000 virtual funds and end up trading only $500 of real money. Using larger capital for your demo account not only gives a false sense of security during practice, but it also robs the trader of the ability to practice risk management on the actual amount that will be traded as real funds. It is amazing how many traders fall for this trap. Don’t be one of them.
Try to ensure that the platform that you will use for virtual money trading is the same or close in architecture to the one you will use for real money trading. Doing otherwise is like performing flight simulations with a MiG and then jumping into an F-16 in real combat. How do you think that will work out?
In addition to these, all settings you will use for real money trading should be used on the cryptocurrency demo account. If you intend to trade with 2:1 leverage on a real account, use this setting on the demo account.
The greatest pitfall for traders in demo trading is that there is no accountability for trading outcomes. The lack of accountability encourages a lazy attitude to demo trading. After all, no real funds are used, so what motivation will the trader have for being serious with the venture? This is why it is important to join a trading group or trade under a mentor, who can supervise the demo trading activity. There should be rewards for proper demo trading, and some form of punishment if laxity is the order of the day.