Getting into forex trading can be a new and exciting experience. It mainly entails either buying or selling currencies through an online marketplace. In fact, the forex market is considered the largest, and most liquid in the world, with pricesoften fluctuating rapidly due to so many transactions taking place every day.
Unlike most trading, individual investors can also get the chance to compete with large hedge funds and other financial institutions. The only thing they need to do is set up a forex trading account. There are generally three types of accounts most traders use, and these are mini/mico, standard, and managed. Demo accounts tend to be optional, and are generally geared toward inexperienced traders. All these accounts have their advantages and disadvantages, which we have broken down below. What kind of trading account is right for you depends on your objectives, your risk tolerance, how much you are willing to invest, and how much time you are willing to spend trading forex. Read below for more information about each account type.
A forex mini account allows novice traders to enter the market with a smaller amount, mainly mini lots. This means that the risk of forex trading is reduced, as well as any potential losses. For a lot of accounts, a mini lot is equivalent to $10,000, or one-tenth of a standard account. Because of their low risk, mini accounts are also a fantastic way to bring in new clients who baulk at trading with full lots due to the large amount of investment required. As investors are only trading with $10,000 increments, beginner traders can trade without completely depleting an account. Experienced traders can also use mini accounts to test any new strategies without risking a lot of money. Moreover, deposits can be as low as $20 to $100, meaning that there is a very low barrier to entry when it comes to opening a mini forex account. Mini accounts also tend to be more flexible compared to standard accounts. If one standard lot happens to be too risky, a trader can then buy several other mini lots to decrease their risk.
On the other hand, as the famous maxim says, low risk comes with low rewards. As mini accounts generally trade $10,000 lots, this means they can only produce $1 per pip of movement. In comparison, a standard account can produce $10 per pip. Micro accounts are even smaller – they trade in $1,000 lots, with pip movements equaling 10 cents per point.
These accounts are the most common. Despite going by a variety of different names depending on the brokerage, such as “intermediate” or “premium” accounts, they are actually just regular accounts. This type of forex account allows users to trade standard lots of currencies worth $100,000 each. On paper, this can seem misleading, as an investor does not need to put down $100,000 in capital to start trading. This is because forex allows for margin and leverage – meaning a small amount of capital can access a large trading position, with the rest of the total trade’s value being loaned by your broker. When it comes to forex trading, leverage is commonly as much as 100:1. So for every $1,000 in an account, an investor can trade up to $100,000 in value. Traders also get better customer service and perks if they choose to use this account.
On the flip side, the barrier to entry when opening a standard account is much higher. Most investors need to put down a minimum balance of at least $2,000, though this can sometimes be as high as $10,000. In addition, with greater gains comes greater risk and thus more opportunities for losses. Especially since when it comes to leverage; when a trader incurs a loss, they must pay what equals the total value of the position, not their initial deposit. This can end up being devasting to inexperienced traders who cannot keep up with the volatile market.
On a slightly different note, as its name suggests, managed accounts are forex trading accounts where a trader puts money in, but the actual decision to buy and sell on the market is left to an account manager. Much like how a stockbroker handles a stock account, an account manager is essentially left in charge of your trading account. A trader only needs to hand them their objectives and goals (such as risk management or speculating in the market) and then the manager will work to meet them. When it comes to managed accounts, there are two different categories:
- Pooled Funds: This is where a trader’s money is put in a mutual fund with other investors, and any potential gains are shared between them. Most accounts are categorised according to their risk tolerance. These managed accounts tend to have a higher risk-to-reward ratio.
- Individual accounts: As its name suggests, it is where a broker handles each account on an individual basis, making decisions for one trader at a time instead of a pool of investors.
Because these accounts are handled by experienced and professional forex traders who know the market well, this means an investor gets more security and does not need to take the time to formulate strategies when forex trading – they can just rely on the account manager to do it for them. Managed accounts are also a great way to diversify an investor’s portfolio without spending time keeping up with the fluctuating market. However, these accounts are unsurprisingly, very expensive. Most of them require a minimum $2,000 investment with pooled accounts and $10,000 when it comes to individual accounts. In addition to these costs, account managers further demand commissions or account maintenance fees that are typically calculated monthly or yearly.
A trader might be hampered by less flexibility because they have to rely entirely on the account manager. So if you see the market moving favourably, you might not be able to immediately take advantage of it. You also need to make sure the account manager is reputable and trustworthy, as they are the ones who will be in charge of your trading strategy and funds.
Forex demo accounts are not true accounts but are often offered by trading platforms to allow novice traders or prospective customers a way to experiment with the trading platform or any trading strategy before moving onto a live account. They are free, and traders can experiment with virtual currency in real-time conditions. This is a fantastic method of getting hands-on forex trading experience. As such, you can have a better idea of how the market works and how to trade using a particular online trading platform.
While there is no risk, making it a perfect opportunity for traders who are staring out forex trading, there are no rewards with using this account either. Therefore, it is recommended that traders treat these demo accounts like a tutorial – once they have learned all they need to know, they can move onto a proper account and start trading with real money.