A forex trading account is usually used to hold and trade foreign currency. While forex trading can be described as an exciting business, where foreign currencies is usually exchanged through the process of buying and selling, not being able to choose the right kind of account can result to huge losses.
In forex trading, we usually have three main types of forex trading account namely; standard, mini and managed accounts. In this article, we are going to look at each individual account, pointing out both its pros and cons to help you make better and informed decisions.
Factors to Consider When Choosing an Account
- Size of the initial investment
- Level of risk tolerance
- Amount of time to be used in trading on a daily basis.
Standard Forex Trading Account
This is the most common trading account in the market. In this type of account, users are usually given access to standard lots which can be worth upto $100,000.
However, this does not necessarily mean that you have to put the whole some of money as capital for you to trade.
The standard Forex Trading account operates on the rules of leverage and margin. This means that it’s only a total of $1,000 that is usually needed in the margin account in order for you to trade a single standard lot.
Potential; The standard account offers large gain potential that no other account can offer. For example, if you have a pip worth $20, you can end up receiving upto $2000 if a position happens to move with you by 20 pips in a day.
Service; Individual investors who operate standard accounts are usually provided with better services and better perks by the brokers. This is because, standard accounts usually require upfront capital in order to trade full lots making it more favorable.
Requires Capital; Standard accounts require that you should at least have a starting minimum capital of about $2,000. Sometimes, brokers ask for more capital hence making it difficult for someone interested in trading but has no capital.
Potential to Lose; Just as we said that the potential to gain is usually high, the same applies to losing. This is because, if a position moves against you, you can end up losing big time which can be really frustrating especially to the inexperienced traders.
Mini Trading Accounts
In this type of account, traders are given the opportunity to make transactions through the use of mini lots.
If you are hesitant about trading full lots through a standard account, then, a mini trading account is your best bet.
Minimum Capital Required; To open a mini trading account, you will only require capital of about $250-$500. Also, mini trading accounts come with a leverage of almost 400:1
Low Risk; Since no large amount of capital is required to trade, mini trading accounts usually give the experienced traders a chance to try out new strategies without running the risk of losing too much capital. Also, the inexperienced traders are given the opportunity to trade without losing much money from their accounts as well.
Flexible; Mini lots are easily managed. Always keep in mind that the key to any successful trading is having the ability to stick to your risk management plan.
Less Rewards; In forex trading, low risks are tantamount to low rewards. Due to its low rewards, mini forex accounts are mostly recommended for the beginners and those who want to try out new strategies without necessarily losing much money.
Managed Trading Account
In this type of account, you get to own the capital but you cannot make decisions on whether to sell or buy. This is because, account managers are the ones who handle these types of accounts.
You only set the objectives and it’s the manager’s duty to execute them. We have two types of managed trading accounts namely; pooled funds and individual accounts.
Professionalism; Having a professional to oversee your account cannot be overlooked. This is because, even when you are not there to watch the market all day, you can rest easy knowing that someone is doing it for you.
No flexibility; This type of account denies you the chance to trade when you see an opportunity in the market. Remember, it is not your decision to make as long as buying and selling is concerned.
Price; Individual accounts require a minimum of $10,000 while the pooled accounts demand for a minimum capital of $2,000. Additional costs are also incurred such as commission that the account managers get as maintenance fee.
Before settling on any particular account, it is advisable to ask for demo accounts. This will give you the chance to test the waters first, before taking a dive.