Types of forex trading accounts
If you want to try something new, then you may want to consider online forex trading. If done well, you can find exciting new opportunities for you to take advantage of, even if you are a beginner looking to trade. In fact, forex is not only one of the largest financial markets today, but it is one of the few financial instruments that allow beginners to compete alongside large hedge funds and banks.
Of course, in order to trade forex, one must open a forex trading account, usually with a broker. There are a few accounts you can choose from, with each one having its own unique properties and advantages. We have listed a few of the popular options below for your perusal, so be sure to keep on reading to learn more about them.
What to consider when opening an account
However, before you even consider opening a forex trading account, there are still a few factors you need to think through first. Thinking through your decisions is extremely important because each forex account has different benefits and limitations, so you must pick the one that caters to your trading style and experience level.
Therefore, here are a few questions for you to think about:
- How much are you looking to deposit?
- What is your risk tolerance level? How much can you really afford to risk?
- Does the account have access to advanced trading tools?
- How much time do you have to devote yourself to options trading?
All of these questions will ultimately help you to decide which forex trading account you should go for.
Different types of forex trading accounts
Overall, there are technically three main types of trading accounts that a forex trader can choose from. As stated above, the account that you choose will depend on how much you want to trade, your risk tolerance level, and the size of your investments. Of course, make sure to do your research before diving right in – always compare prices, services, and fees, so that you will not be caught by surprise!
Mini or micro accounts
A mini or micro-trading account is simply an account with a small cap. This means it only allows traders to make transactions using mini lots. In most accounts, a mini lot is equal to around $10,000, which is one-tenth of a standard account. A micro account is a sister account to the mini, with these accounts trading in $1,000 lots instead. This means their pip movements are worth 10c per point. As such, these types of accounts allow beginners and novices to enter the market with smaller trading quantities, which helps to lower the amount of risk and reduce the chances of any potential losses occurring.
On the flip side, restrictions are often placed on the size of trades, which means with low risk, comes lower potential rewards. For instance, with a standard account, traders usually enter into position sizes of 100,000 units of a standard lot, while a mini account only allows 10,000 base currency units. This means that mini accounts only produce $1 per pip of movement, in contrast to the $10 in a standard trading account.
While mini accounts generally come with lower returns, their low risk allows traders – especially beginners – a lot of flexibility when it comes to experimenting and testing new strategies without risking a lot of their funds. Therefore, this type of account is generally recommended to novices looking to dip their toes into forex trading, as well as develop their own strategies before investing more money and time.
Most brokers that offer standard accounts also end up offering mini accounts. This is a way for them to entice and bring in new clients, who may be slightly hesitant in forex trading due to the heavy investment initially required.
Standard accounts
Depending on the broker, standard accounts can be referred to with different names, such as ‘Classic’, ‘Premium’, ‘Gold’, or ‘Intermediate’, to name a few. However, these accounts are simply the regular accounts that most brokers offer. They are the most common, and it gives users the ability to trade lots of currency worth $100,000 each.
Surprisingly, this does not mean you have to put down $100,000 in order to start trading. This is because forex allows traders to utilise margin and leverage. Leverage is where traders can borrow money in order to open a larger trading position and only pay a fraction of what it is worth. This means that despite having lower funds, it is still possible for traders to find advantageous opportunities in forex trading. However, it is important to note that leverage also magnifies risk – because if a trade goes against you, traders will have to pay back what the entire trading position is worth, not just the initial deposit (the margin).
Opening a standard account also allows traders to get better services from their brokers. This is because brokers will provide better perks for individual retail investors. That being said, most brokers require their account holders to reach a minimum balance or capital requirement, sometimes of at least $2,000 – $10,000. As such, these types of accounts are generally recommended to more experienced traders.
Managed accounts
These types of accounts are slightly different from the other two. Instead of you being in charge of your investments, managed accounts allow account holders to put in their funds and leave all decision-making to the account manager. The only thing you need to do is input your objectives, risk tolerance levels, and goals, which the account manager will set out to meet. Managed accounts can also be divided into two categories, which are:
- Pooled funds: this is where your funds are placed in a mutualfundwith other investors, and all earnings are equally shared between everyone. These accounts are categorised according to risk tolerance. For example, a trader looking to make quick and higher returns may put their funds into a pooled account with a higher risk-to-reward ratio. While a trader looking for something steadier and more consistent may pick another fund. Always be sure to read the fund’s prospectus before you invest in it.
- Individual accounts: As its name suggests, these accounts are managed by a broker individually who decides for every single investor instead of a pool of investors.
The major benefits of this account are clear: you can get more security and no longer need to spend a lot of time researching and monitoring the markets – instead, the account manager will do it in your place! As they are a lot more experienced and professionals in their field, the trades they pick are likely going to be a lot more advantageous than if you did it yourself. So, if you want to take a hands-off approach to forex trading, this account is for you.
However, most managed accounts require a high upfront investment. This is not even including account managers earning commissions, usually in the form of a monthly maintenance fee. Also, because the account manager is in charge of making all the decisions, you have less flexibility. That means even if you see the markets moving, you will likely not be able to place a position. So, this type of account is recommended for people who do not have any time or interest in watching the markets.
