Forex Trading Accounts
In recent years retail currency trading has grown hugely in popularity and the demand for different types of Forex accounts has grown. There are many different account types available to anyone who wants to invest in the online exchange market.
The Foreign exchange market is a highly leveraged market for speculating on currency valuations. Traders can purchase large amounts of currency units using little capital. Leverage is what makes Forex attractive to many traders - with leverage one can make more profits because they use less of their capital and borrow the rest.
There are different types of accounts available to help investors better manage their capital as well as their transactions.
It is therefore important that the currency traders consider what they want to get out of their trading, before deciding on the Forex account type to open.
Below is a comparison of the three types commonly used to trade foreign exchange currencies. The review below explains the different features of each of the three types.
A Standard Account is denominated in US Dollars and transactions are placed using standard lots. One standard lot is 100,000 units of currency. One lot is also known as a one contract. Minimum opening capital - at least $10,000 USD.
1 contract refers to the minimum size of a single transaction. This option is the most suitable for investors with a enough capital to invest - this option requires $10,000 to $50,000 dollars in starting capital, For this account the investor will not be under capitalized and with good money management rules and money management strategies, this option has the highest chance for profitability because it is not under capitalized. Under capitalization is what makes most investors not profitable.
It is not recommended to open a standard a/c unless you have a balance of at between $10,000 minimum and $50,000.
Professional Money Managers recommend $50,000 Dollars minimum to open this account and only opening 1 or 2 lots maximum per every $50,000 dollars you have. However, most brokers will still open this one for you if you have more that $10,000.
If an exchange rate for EURUSD is quoted at 1.4000, then the smallest transaction available in a standard account is worth $140,000 of currency to buy 100,000 EUR. With leverage of 100:1, this is only $1,400 of your money and the rest of the money you will borrow from your broker (with leverage of 100:1, your broker gives you $100 dollars for every $1 dollar that you have, therefore for this transaction using only $1,400 of your capital, the broker will give you $100 dollars of leverage for every $1 dollar you have, meaning after leverage you will have $1,400*100=$140,000 which you can then buy 1 contract of EURUSD).
For Standard Minimum Price Movement of 1 pip = $10
A Mini Account is one that allows investors to make trades using mini lots. A mini contract is equivalent to $10,000 which is one-tenth that of a standard contract. Brokers offer mini contracts as a way to attract investors who do not have a lot of capital - as the minimum required starting capital is about $1,000 USD
Mini lots are similar to standard contracts; however, minis are traded in lots of 10,000 units of currency rather than 100,000 units. This lowers the initial deposit required to open a mini and offers better risk management for investors without a lot of capital.
This mini is recommended for those with only a few thousand dollars as capital.
If an exchange rate for EURUSD is quoted at 1.400, then the smallest transaction size available in a mini account is worth $14,000 used to buy 10,000 EUR. With leverage of 100:1, this is only $140 of your money.
A mini is suitable for equity balances between $5,000 and $10,000. The transaction lots are smaller so the traders without enough capital to open standard contracts have better money management for their equity balance.
For Mini - Minimum Price Movement of 1 pip = $1
Micro Accounts use contract sizes of only 1,000 currency units. These are often appropriate for investors without a lot of capital and can sometimes be opened with only a $100 minimum balance.
This option allows the trader to open trades in micro lots. 1 micro is one- tenth of a mini and one-hundredth of a standard contract.
If an exchange rate for EURUSD is quoted at 1.400, then the smallest transaction available in a micro is worth $1,400 used to buy 1,000 EUR. With leverage, this is only $14 of your money. This option is generally best suited for equity balances that are between $1,000 and $5,000
For Micro - Minimum Price Movement of 1 pip = $0.1
In Forex, one lot is the standard transaction minimum of a given currency pair. But many brokers offer fractions of this lot to enable more retail traders to access the foreign exchange market. Being able to offer mini lots reduces the minimum transaction size thus giving the beginners and also those without a lot of capital to start investing with an opportunity to get a feel of the foreign exchange market.
There is availability of online tutorials that one can read even before opening an account, and to get extra practice at no risk one should open a practice Forex demo with a broker. The demo money is equivalent to money of a game of monopoly and therefore traders can practice placing transactions without investing real money.
During the training period using the demo, the beginner trader will learn the key factors needed to succeed such as; education, money management, FX plan and FX systems.
The types of Forex strategies used and the skills required for any of these 3 are essentially the same - those required for the Standard or Mini or Micro Account are the same the only difference to be adjusted are the money management rules for each.