Forex Trading Accounts and the Value of a Pip
The process of opening a Forex trading account should be strongly related to the decision to choose a Forex broker as depending on the type of the trading accounts the broker offers and the trader’s trading style, the broker may be selected or not. Rookie traders will do anything to start trading in a blink of an eye without even knowing that the type of a trading account can definitely influence the performance, not to mention the profitability. Forex brokers use different technologies for accessing the interbank market and based on that they are split into categories that offer specific terms for their trading accounts. For example, a dealing desk broker will focus on spreads and not on commissions, while a no dealing desk broker will look to add a commission as a markup for each and every trade opened.
Types of Forex Trading Accounts
The brokerage business is characterized by extreme competition and brokers, therefore, will use any possible strategy in order to attract as many clients as possible. As a consequence, in order to further differentiate the offer, brokers allow clients to choose from a multitude of types of trading accounts, based on each and every trader’s style.
These are to be avoided by all means. They are still being offered by brokers that failed to adapt to new technologies available in the Forex industry and their main drawdown is the fact that trading at the market is virtually impossible. Forex markets are moving really fast and there are times when a trader wants to open a new trade or close one at the market. Due to the old technology, these brokers will not be able to execute the orders and will requote multiple times before the actual trade is placed. In the meantime, markets move so fast that it doesn’t really make sense to enter the trade anymore. Moreover, the spreads are quite big at these brokers and they are not comparable with new offerings in the brokerage industry. Good thing is that there are not many brokers anymore to offer this kind of trading accounts but if you do see one, it is to be avoided.
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These are the standard norm now and a five-digit account means that the broker is either a dealing desk or uses Electronic Communication Network (ECN) and/or Straight Through Processing (STP) as a technology. This is very good as these accounts will fill any order at the market with the only condition that a market is there to take the order. Considering the fact that the foreign exchange market is one of the most liquid in the world, if not the most liquid, then finding a market is not an issue. Such trading accounts bear different costs as the broker is not doing charity work and as a market maker the focus will be on spreads ( the difference between the bid and ask prices) while an STP or ECB broker will focus on little or no spreads but for every trade will charge a commission.
Trading Accounts Based on Funds Deposited
Depending on the funds deposited, brokers may offer different trading conditions. There are brokers that offer VIP accounts for, say, deposits over $20000 or more and they may offer customized spreads and costs/commissions if the amount is even bigger. A trader should be careful though with this kind of offers as funds safety is the most primordial thing and should be strongly related to the segregated rule the broker works with. If the broker guarantees up to 50K in a trading account, then it doesn’t make any sense to deposit more than that as the risk is all on the trader’s side.
One of the most interesting Forex trading accounts are the swap-free accounts. A swap is a positive or negative amount that is being added or deducted from a trading account after each and every trading day that a position is kept open. Traders that look to hold open positions for a long time, like swing traders or investors, do not want to pay a negative swap every day. Nowadays, with negative interest rates and overall easy monetary policy all over the world, swaps are mostly negative.
In order to overcome this, some brokers offer swap-free accounts. Don’t kid yourself though that those accounts are coming with no other costs, as either conditions to open such an account are prohibited to the vast majority of retail traders, or other costs associated with normal trading are bigger than usual. The same accounts are called Islamic accounts in the Arab world as it is forbidden to pay a daily interest there. However, a swap free account and an Islamic one are basically the same things.
The Value of a Pip
The difference between the opening price of a trade and the closing one is being calculated in pips. If this difference is, for example, ten pips, then the loss or the profit associated with it is calculated based on those pips. The value of a pip though is directly correlated with the volume traded for that position. It is one thing to trade one lot and another thing to trade ten lots, as for one lot on the EUR/USD pair one pip is worth $10 and for ten lots it is worth ten times that much. Therefore, being profitable when trading the Forex markets is not necessarily related to which trader is making more pips, but what is every pip worth. Traders are for long struggling to find the right balance between the balance of a trading account and the volume traded in order for the pips won to make sense for a steady growing trading account. Unfortunately, this calls for money management rules to be respected day in and day out when trading the Forex markets and this is not a simple thing to do due to basic flaws in human nature: greed and fear.
Other educational materials
- The Importance of Swap and Spreads
- How to Enter/Exit a Trade
- How Do I Make a Profit from Forex Trading?
- Forex Market Terminology
- Profit from Forex Trading Using Different Trading Styles
- How to Set Up an Expert Advisor
Recommended further readings
- Currency traders and exchange rate dynamics: a survey of the US market. Cheung, Y.W. and Chinn, M.D., 2001. Journal of international money and finance, 20(4), pp.439-471.
- “On the utility of trading criteria based retraining in Forex markets.” Loginov, Alexander, and Malcolm I. Heywood. In European Conference on the Applications of Evolutionary Computation, pp. 192-202. Springer Berlin Heidelberg, 2013.