Contents
The foreign exchange account (Forex account) is used in foreign currency trading. Opening a new Forex account is a very important thing, especially for inexperienced traders. Several things need to be considered before choosing the appropriate account. First of all, one should be fully prepared for it and don’t make rapid and rough decisions. Choosing the right type takes time as well as knowledge. Traders are recommended to consider all trading account types, analyze each of them and only make a final choice after that.
Potential investors should assess their opportunities in the Forex market, including their budget or a trading strategy as well as what type of Forex traders they are willing to be in the future. There are three major trading accounts in the forex market: Standard Account, Mini Account, and Managed Account. Furthermore, almost every broker offers demo accounts to attract new users, and also for new traders to get used to their platforms by practicing their skills in the virtual world without putting actual money at risk.
Each of these Forex accounts has its own pros and cons and there are several things that new traders need to know before choosing the one. Such factors include risk tolerance, transaction costs, spreads, and commissions, and software platforms. Moreover, one should analyze the average amount of money he is wishing to invest as well as the average time he’s going to spend in the Forex trading market.
In this guide, we will further discuss each of the account types in Forex in a detailed way including standard, mini, and managed accounts. We will analyze their characteristics, their advantages and disadvantages, and what they offer to the investors. It will help you find out which type is the most appropriate for you.
The main Forex trading accounts
Before the potential investor chooses which account type will be beneficial for him or her, one should take some of the main characteristics into account including the pros and cons of each one.
Standard Account
The standard account Forex (standard trading account) is the most popular and widely used account in the Forex market. The names of this account can be different depending on the broker. Some call it Classic or Intermediate accounts. The account gives traders access to the standard lots of currency that has a worth of $100,000. A lot of people might think that this means you have to invest $100,000 to start the trading process, however, this is not the case. Traders should remember that there is no need to deposit such a big amount as the Forex market offers leverage (The average ratio is 1:100 in Forex). This means that only 1000 USD is required for a standard lot to be traded. Even though leverage can increase the profit potential, it can also cause a great deal of loss. So this fact always should be taken into account.
There are a lot of advantages of using the forex standard account. For example, usually, the brokers provide a very good service for the investors who have this type of account. Besides, there are additional features that individuals with this account have access to, so they can enjoy a lot of benefits and a high quality of service. Mainly this is because this account needs high base capital to trade full lots.
Another beneficial thing about the standard Forex trading account is that gives people an opportunity to generate a big amount of profit. For example, if there will be 100 pip growth in one day, the final gain will be $1000. With only one standard lot trading, this account has the best gain potential among the other forex accounts.
However, the standard account has disadvantages as well that also needs to be considered. The main con of this account is that it requires a high amount of capital to start investing money. This number can be as high as 5,000 USD or 10,000 USD. The minimum deposit usually is at least $2000 which is not a little amount of money. So it can be said that some market knowledge and skills are required to trade with the standard account.
Besides, another key factor is that as we have already mentioned, there is a high probability of capital loss as well as gain. This loss can be very catastrophic especially for beginner traders who don’t have enough skills and experience gained yet. So this is not surprising that in many cases, this type of account is only recommended for professional traders.
Mini Forex Trading Account
This FX account type allows traders to use mini lots while making transactions. This account is beneficial for the investors who do not wish to trade with full lots in the standard account because it requires a big amount of capital to be invested. A mini lot of this account usually means $10,000 or equals one-tenth of a standard lot.
The mini Forex trading account also has its advantages and disadvantages. The major perk of this account is that this is for both, experienced and inexperienced traders as well. This is because this account type has a lower risk than the above-mentioned one which means that people investing their money with a mini lot or 10,000 USD can test the platform, develop new strategies and find out everything about the Forex market without causing too much trouble and risking the big amount of money. That attitude is also beneficial for professionals because that way they try to improve their trading skills.
Another big advantage of this type of trading accounts in Forex is that it doesn’t require a big capital to be invested. The minimum amount by which this account can be opened is $200 or $500 with the 1:400 leverage ratio. This fact means that people can generate a great deal of profit with fewer funds and without putting too much at risk. That flexibility is a high priority for many people, especially those who think that good risk management is the most essential thing in success.
However, while discussing this account, it should also be noted that it has some cons as well. For example, the Mini account doesn’t allow people to earn as high income as the standard account because it produces only 1 USD per pip of movement.
Managed Trading Account
Another Forex account type is Managed trading account where you invest your capital but you don’t make any decision about the trading processes. You just set your profit goal and the risk level, the other things are managed by the account managers who try to reach those goals instead of you. Usually, this account has two types: Pooled Funds and Individual Account.
Pooled Funds are the same as mutual funds where your invested money is put together with the other traders’ capital and the final profit is shared among them. Pooled funds account is divided into categories according to the risk tolerance. If someone wants to generate a big amount of profit he will risk a little bit more. However, for someone who isn’t that risky, there is still a chance to gain money, even though it will be less amount, it also will be with less risk. Traders who are interested in Managed accounts are recommended to read its terms and conditions attentively.
Another category is the individual account where the broker is responsible for each Forex account and the latter is making all the decisions about the investor funds.
Let’s discuss the pros and cons of the Managed Trading account. First of all, the most important advantage of the account is that sometimes it’s a luxury to have a professional broker who helps you with your investment growth. In many cases, the experienced trader’s guidance is the key factor why people choose to trade with the managed account.
However, it has its own disadvantages that also need to be considered. The main con is that this account requires quite high investment capital, a minimum of 2000 USD for pooled accounts and 10,000 USD for the individual ones. Besides, it’s also important to note that professional brokers charge traders with the fixed commission that is called an account maintenance fee. The amount of this commission is calculated monthly or yearly.
In addition to this, another unpleasant thing about this account type in Forex is that it doesn’t give people an opportunity for flexible trading. This is because the account managers are responsible for all your actions and you aren’t able to make many choices in the market. This means that traders don’t gain much experience and they don’t develop new skills as they are not independent while trading. For example, if one sees that the market is in a good condition for the capital investment, the trader has no choice but to sit and wait for the account manager to decide whether it’s good to invest in that specific time or not. So it can be said that the forex managed accounts are for people who have a good amount of capital and less time to be involved in the market.
Demo account
A Forex demo account is used by new traders to practice in a simulated environment with virtual cash. With this account, people can find out almost everything about the platform, try out different strategies, gain some skills and get used to the market in general. Because of these reasons, this account usually is dedicated to beginner traders. This account has almost the same interface as the live trading account and it allows people to trade with the same type of environment, though without putting any capital at risk as the virtual funds are used in the money exchange processes.
This is a must-have account for each trader because it gives people a chance to practice and get ready for starting trading on the live accounts. This account is the best option for the beginner investor who doesn’t know how the market works and what are the main important characteristics and useful strategies to generate a great amount of profit. however, some professionals also have a demo account because sometimes they also wish to test the platform and find out new tools and strategies before investing real money in trading.
As we can see, the advantages of the demo account are countless. Though it should be noted that it also has some drawbacks that beginners have to consider to be successful traders. For example, using virtual money may harm people’s expectations about their emotions. This means that losing the unreal money is way different than losing the actual one, so it’s almost impossible to have the same reaction. Therefore, sometimes this might become the reason for unwanted consequences in Forex trading.
On top of that, people should always remember that even though a demo Forex account gives various opportunities for the new traders, the simulated world is way different than the real one, and traders’ decision-making process might also change while turning into the live accounts with the actual funds and the real risks at their hands.
Choosing an appropriate trading account
Several things need to be considered while choosing one of the above-mentioned accounts. Such influential factors might be risk tolerance, the size of the investment capital, the amount of time the trader is going to spend in the market, and the investor’s experience. choosing an appropriate account is one of the most important decisions that can be taken in the trading career so it must always be taken seriously.
Another important thing to consider is the speed of the trading platform that affects a great deal on the final success of the investment. Therefore selecting an appropriate platform is also the key thing before starting investing on the live account. There are some main must-have characteristics of a good trading platform including a diversity of the trading assets, tools, strategies, and features.
As we already have mentioned above, different Forex account types require a different level of experience from the traders. For example, a Standard account needs high base capital to trade full lots, this means that there is a high risk of losing the invested funds. Therefore, this type of account is only recommended for professional traders because it required a good knowledge of the market and great risk management skills as well.
In many cases, Micro accounts are a perfect match for beginner traders because it allows people to enter into the market with the small amount of capital. Besides, the account helps them to control the risk levels that make the trading process easier for new investors.
Final Words
Selecting the right Forex account is the most essential thing a trader will make in his career. It needs skills as well as experience to fully analyze what potential has each of them, what options they offer, and why they will be beneficial. This is why it’s very important to consider every type of account and take a final decision after that.
As we have already discussed, there are three main trading accounts in the forex market: Standard Account, Mini Account, and Managed Account. They have both advantages and disadvantages and one should take close attention to them before starting live trading, especially to the major factors such as risk tolerance, transaction costs, spreads, and commissions, and software platforms.
Besides, no matter what account trader wants to choose, it’s always highly recommended to practice the platform in the first place. This is what the Demo accounts are created for, as they allow people to try out all the services and strategies without risking the actual funds.