Forex trading: Understanding account types and differences

Author: Forex Live | Category: Education

Instaforex: See what different account options are available to FX traders 

Instaforex: See what different account options are available to
FX traders 

There are a number of different account types available in the FX sphere and this article will run you through some of the most popular account options there are and outline some of the key advantages and disadvantages.

The first account type we will discuss is the entry point account that all traders begin with; the demo account.

Demo account, the entry account for all traders

A demo account is a brilliant way to start trading and is offered by virtually all brokers. This is a demo or 'virtual' account that gives you a nearly identical experience of trading, but without the risk of losing capital,

Advantages

Trade with liberty: The absence of capital risk means that you can trade with freedom. You can allow trades to develop exactly the way you want them and practice following

Forgiving of mistakes: If you lose your demo account, you can just re-set it and start again. All capital risk is artificial and without consequences to your income or lifestyle.

Disadvantages

Easy to trade incorrectly: You can misuse a demo account by not treating it as a demo. The whole point of a demo account is to trade it with liberty and freedom. Trading it like a real account will not allow you to practice the necessary skills you need for your longer-term trading development. 

Advantageous spreads: Sometimes a demo account will give you unrealistic spreads and fills. Real market conditions may be radically different to the artificial demo account environment.

Mini trading account

A mini trading account allows you to start investing in trading Forex with a small personal investment up to about $500. You can then use leverage, with some brokers offering high levels of leverage, which would enable a trader to access a large trade size relative to the capital in their account. Here are some of the advantages and disadvantages of the mini account.

Mini car


Advantages

Small capital at risk: the key advantage of this type of account is its accessibility. Many traders are easily able to afford this account and the use of leverage means that, for the experienced trader, some money can still be made on a comparatively small initial outlay.

Low risk: This is an excellent option for beginner traders who would like to try and graduate from a demo account. A mini account offers a great first step to graduate from a demo account and begin to experience the emotions involved with a live account

Risk management: The skills needed to manage risk on a large account can be practiced here on the mini account. The reality is that if you can manage your risk responsibly on a small account then you can do exactly the same on a larger account

Disadvantages

Limited gains: Although an excellent entry into the forex trading world, you are not going to be able to make a living trading a mini account.

Standard trading account

The most common trading account which goes from around $1000 up to around $10000. Different brokers require different capital requirements in order to open a standard account. Again, let's go through the different advantages and disadvantages of this account

Advantages

Potential for genuine gain: The larger deposit size, coupled with the use of leverage does allow for a potential larger gain.

More services from the broker: The greater commission generated from the standard trading account means that the broker is motivated to keep their client trading successfully with them. A number of brokers will offer additional services for standard account holders.

They may include, but are not limited to, a provision of an educational service, a dedicated account manager, access to professional FX services and a cash bonus deposit bonus.

Disadvantages

Potential for significant loss: However, the use of leverage and larger capital requirements means that this is only suitable for experienced traders. Trading takes time and rushing it will end in some kind of disaster, sooner or later.

Larger capital requirements:  Minimum capital requirements in opening a standard FX account varies from broker to broker. Expect minimum requirements to sit somewhere between $2000 - $10000.

Managed trading accounts

This is a trading account where you provide the capital requirements, but another trader, or robot, executes the trades. There is an increasingly varied way of doing this from social trading platforms, to professional FX traders and in-house broker services which link other traders to your account automatically.

Once again there are pros and cons of using a managed service. Here are some of the key advantages and disadvantages

Advantages

Potential for profitability: If you are unable to trade profitably, having someone who can trade for you can mean that you are making, rather than losing, money in your account.

Get away from the screen: Trading can be absorbing, and time consuming, Having someone else trade for you means that you gain freedom to do something else

Disadvantages

The price of freedom: You will obviously have to pay a premium to have someone else manage your account. This could be paying via a monthly subscription, a profit share basis or some other commission structure, either way, it is a luxury you will have to pay for

Placing your trust in someone else: Ultimately, whether it is a man or a machine, you will be putting your trust in something other than yourself. This can mean that the good trade you can see may not be taken. It also means that you may incur large losses due to human or machine error.

It can be hard to accept losses that comes this way and some people prefer to have their own control over their account at all times.

A couple of closing points

Metatrader 4, Metatrader 5, and web trading

Some accounts offer access to MT4 or MT5 accounts. The main difference between MT4 and MT5 accounts is that the MT5 platform has a wider range of instruments, including currencies, but also including stock CFD's.

Web trading options can be good, but you need to check that platform is reliable. MT4 has been around for years and has been proven over time.

Different spread options

Some brokers will allow you to pay commission in different ways, as suits your trading style. So, for example, you may have the option of a fixed spread. This means that you know in advance the cost of trading a particular currency or instrument.

The cost is fixed for each trade you take. By contrast, a variable spread option will give you a variety of prices throughout a trading day. The price available to the broker is constantly changing, so a variable spread reflects that change.

A raw spread option would be where you pay the minimum spread, but you pay a round commission on the trade. So, it could be something like, $5 per round commission plus the raw market spread.

Which is best? It depends on your trading style, trading volume and time you trade. If you trade during busy market times then a variable spread would be good for you. If you only ever trade in the quiet Asian session then a fixed spread will probably be the best way to go.

This article was submitted by Instaforex.

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