There are several different kinds of forex accounts for the retail forex trading client to consider. Most forex brokers offer demo accounts to allow new traders to practice entering trades or evaluating execution methods. It’s good practice to try out demo accounts with a variety of dealers. After the trader is familiar with the firm’s software and understands how to access charts and other tools, it’s time to fund the forex trading account to enter live trades.
1- Many regular and online forex brokers offer mini forex accounts, full forex accounts, and managed forex accounts. Choosing your forex trading platform will depend upon your capital at risk and/or account type, preferences, and forex trading goals:
– Mini accounts are a type of broker account frequently used by beginning forex traders entering the forex market. A mini account enables the trader to take smaller positions in currencies.
– If the trader was required to trade standard forex lots used by traders with regular accounts, he/she would need to enter greater unit size. For instance, a trader with a mini account can trade contracts of 10,000 units vs. the typical 100,000 units.
– Smaller contracts are frequently more appealing to new forex traders who don’t want to put large amounts of capital at risk.
– Mini account holders may access the same tools as other account holders, including trading charts and software.
2. Regular accounts are frequently chosen by experienced forex traders. Many firms provide the experienced trader with lower borrowing costs. Because forex standard lots are so large, forex brokers and dealers offer access to leverage in a margin account:
– A forex margin account is quite similar to a stock margin account. Generally speaking, the trader takes a short-term loan from the broker/dealer, and the loan amount equals the amount of leverage and risk the forex trader assumes.
– Before the trader enters a transaction, he/she must deposit funds into a margin account. The amount the forex trader deposits depends upon the margin cost agreed to by the trader and the forex firm.
– Regular accounts are likely to trade in minimum 100,000 units. The margin account percent is frequently between 1-2%.
– If the trader decides to trade USD 100,000, he/she must deposit $1,000 at 1% margin. This amount is the broker’s security. The forex firm finances 99 percent of the trade. If the trader’s position goes against him/her and losses reach $1,000, the firm may make a margin call. At that point, the trader must deposit more funds into the account or close the position to avoid greater risk.
– The trader doesn’t pay interest into the margin account, but if he/she doesn’t close the position before the designated date of delivery, it is rolled over. At that time, interest is charged on the long or short position and short-term interest rate(s) of the underlying.
3. Managed accounts allows investors who want exposure to the forex markets (but don’t want to make trading decisions) to achieve diversification or hedge portfolio currency risk. Managed accounts involve a forex trader who trades a specific forex account for the benefit of the client in exchange for fee(s):
– A managed forex account is similar to engaging an investment manager to trade stock and bond investments. Because returns and costs of forex managed accounts differ, it is essential to perform research and compare options before choosing a managed forex trading account manager.
– Some managed forex accounts may offer proprietary trading system advantages. Although there is no such thing as a prop system that achieves all wins and no losses, some forex trading firms develop elite black box programs and offer managed accounts to their best customers.
Forex Trading Platforms
Ultimately, the trading platform you choose depends on your preferences for analysis, trade execution, and order-entry/taking. Some currency trading platforms may be used to enter other securities trades, such as futures or stocks, but costs of these platforms are widely variable. For that reason, most forex traders choose a forex-specific trading platform.
Consider these elements before choosing your forex trading platform:
1. Fee structure: Forex market makers may promise traders no exchange fees, data fees, or commissions. It’s important to understand what this means because, if the firm doesn’t charge transaction fees, you must know how they’re getting paid.
– Trades net of fees, such as fixed or variable spreads, should be compared to commission charges offered by other forex firms.
– The trade spread is simply the difference between the market maker’s price and your price.
– For instance, if you see the EURUSD pair quoted at 1.4953-1.4956, this spread is three pips, or the difference between the last decimal place in the quote. A market maker offering a fixed spread in this example will offer a three pip spread for every trade. If the market for your currency pair is particularly volatile, you might consider this fee structure. If you need at-the-money execution and want to avoid slippage, a fixed spread may be an attractive fee structure.
– If the forex firm offers variable spreads, you will be quoted different spreads. The currency pair you’re trading and current market volatility will determine a low spread of around 1.5 pips to a high spread of five pips.
– Some firms charge tiny commissions, such as a fractional pip, to a market maker for execution. These brokers may save you money on transaction fees.
– Not all forex firms make equal markets. Since forex trading occurs in an over-the-counter environment, large traders (like financial institutions) make relationships with other large traders and primary market makers. Price aggregators, or online retail firms, base trades on credit and capitalization of the trading partner.
– Your firm’s ability to pass low transaction costs to you depends on its relationships and volume. In general, high volume firms receive tighter, smaller spreads.
– In comparison, commission forex brokers require you to pay a commission per transaction. For instance, if the broker charges 0.2 of a pip, you will pay USD 2.50-3.00/100,000 units. Some offer access to their proprietary trading platform in exchange for commissions. If this trade-off is an advantage, consider it.
2. Functionality: If you need mobility, functionality of the platform is likely to be very important to you. A forex trading platform that’s fixed to a desktop offers limited function. Look for trading platforms that allow you to trade using a choice of mobile devices.
– If you work with one or more traders, a work station environment may be ideal. Consider your forex trading needs before choosing a forex trading platform.
– Consider the importance of use-friendly interface, advanced charting, execution time, and social trading
3. Product Quality: Determining the product quality before choosing a forex trading platform may require time and comparison of several firms’ demo accounts.
4. Tools Included: Access to charts, feeds, and customer service are important for most forex traders. The firm’s demo account allows you to access and test these tools.
Opening a demo account at most forex broker/dealer firms is the best place to start when choosing your forex trading platform. Before funding your mini or full service, try out the firms’ software to assist you in deciding the best forex trading platform for you.