Investor’s Guide to Forex Trading Accounts Types
Opening your first forex account is one of the biggest steps you can make as a beginner trader, so it’s certainly not something you do unprepared.
Many beginner traders either rush into selecting an account type without properly understanding what it offers. Others become overwhelmed by the many different account types available. Both of these approaches are wrong but don’t worry, our experts are here to help.
Choosing a forex account type requires you to carefully consider a variety of things, including what type of forex trader you wish to be, your budget and your trading strategy. It’s important that you choose the right account for you, as your account type can impact your performance and profits.
On this page, you can learn:
- The different types of accounts offered by forex brokers
- The value of a pip, and how this relates to choosing a forex account
- How to pick the correct account type for your trading style
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Types of Forex Trading Accounts
All good forex brokers allow clients to choose from a multitude of types of trading accounts. Many account types, however, share certain qualities even though they may go by different names from broker to broker.
We will soon talk you through each different forex account type, but first, you need to understand the value of a pip and lot sizes.
The Value of a Pip
The difference between the opening and the closing price of a trade is counted in pips. On any trade, your loss/profit is also counted in pips.
The value of a pip is directly related to trade volume. In forex, trade volume is counted in specific amounts, namely ‘lots’. This represents the number of currency units you will buy/sell in a trade.
A standard sized lot is 100,000 units of currency. There are also mini lots (10,000 units of currency), micro lots (1,000 units of currency), and nano lots (100 units of currency).
The value of a pip is different depending on the lot sizes you are trading:
Value of a Pip Per: Unit Standard Lot Mini Lot Micro Lot Nano Lot $0.0001 $10 $1 $0.1 $.01
Therefore, being profitable when trading the Forex markets is not necessarily related to which trader is making more pips, but what each pip is worth.
Having a good understanding of what these units of measurement (lots and pips) mean before selecting an account type is important, as different account types allow you to trade different lot sizes. You should, therefore, review your capital and the volume you wish to trade before choosing an account.
The Most Common Trading Account Types
As we’ve just explained, the most common live trading account types are based around the size of the lots you wish to trade. Considering this, each different type of account has a different minimum deposit level too.
Micro accounts are, as their name suggests, accounts suitable for traders with a small amount of capital. They allow you to enter the market with a small minimum deposit limit ($100 or less). As these accounts have a low barrier to entry, however, there are restrictions on your trading activity. Most micro accounts limit you to trading nano or micro lots. This helps you to control your risk-levels, making these types of accounts perfect for beginner traders.
Different brokers use different names for their standard accounts. Some brokers may call this type of account ‘Classic’ or ‘Intermediate’. They may also refer to them as ‘Premium’ or ‘Gold’ accounts, which is a little misleading as these accounts are actually the broker’s regular offering.
Standard accounts usually have a minimum deposit limit of around $100 – $500, and they allow you to trade mini-lots. Some standard accounts, however, may also allow you to trade standard lots but this is rare.
Whilst the names of these account types suggest that you would need to be accredited if you wished to open one, that’s not necessarily the case. VIP accounts are generally just reserved for those who have a large amount of capital. They have a high minimum deposit limit (around $10,000) and allow you to trade standard lots. These types of accounts are usually ECN accounts too, which means they allow you to trade in the market directly.
It is important to note that professional accounts for EU clients are slightly different. Under European regulations by ESMA, regular retail traders are subject to leverage limits. Should you want to access higher leverage levels, you can apply for an EU professional account. In this situation, you will need to prove your trading experience and credentials. This could be by passing a test or by submitting documentation.
Other Forex Account Types
Aside from the main three account types, there are some other account types you should become familiar with. These types each have their own specific purpose.
Demo accounts allow you to practice your trading. They are virtual accounts loaded with virtual currency. Almost all demo accounts are free, yet they may have a limited usage period. This is normally around 30 days. If you proceed to open a live account with the same broker, however, you may regain access.
Demo accounts are useful for both beginners and experienced traders. Novice traders can use them to get to grips with different trading platforms and to see the effects of their trades in real-time. Experienced traders also use demo accounts to test their trading strategies risk-free.
Most of the trading account types mentioned above will come with swap fees. This refers to the fee you incur for holding a position overnight. Traders who wish to hold positions open for a long time however, such as swing traders or investors, suffer heavy fees with a regular account. To prevent this, some brokers offer swap-free accounts.
Whilst swap-free accounts can seem appealing, it’s not simply a case of avoiding fees. Swap-free accounts usually come with higher trading costs and various restrictions. As such, unless you do plan on holding positions for a long time, it is normally best to avoid these types of accounts.
One exception to this rule is if you are a Muslim forex trader. Swap-free accounts are also sometimes called Islamic accounts. This is because they are often used by Muslim traders who cannot incur interested fees due to their religious beliefs.
How to Choose the Right Forex Account for You?
Knowing the different types of forex trading accounts only goes so far in helping you choose an account. You also need to know your own situation well and know exactly what you want to get out of trading.
Before opening up a trading account, therefore, you need to ask yourself a series of questions:
- How much do I wish to deposit? This is a key question, as it can shrink your account options significantly. You need to weigh up how much capital you have, and how much of that you want to deposit with a broker. It is always worth remembering that you should never trade with money that you can’t afford to lose.
- What is my appetite for risk? One of the most important things you can do as a prospective trader is to assess your risk appetite. If you’re a conservative trader, for example, you may be quite happy with a micro account where you can trade nano and micro lots. Those who wish to trade more aggressively may want to opt for a standard account where they can trade standard lots.
- Do I need access to advanced trading tools? Many brokers reserve their best trading tools for their professional clients. This may include innovative news analysis or access to a larger range of indicators.
These are tools which can very beneficial to expert traders, who may be managing more than one account at once. Do note that whilst its easy to feel like you want access to as many tools as you can get your hands on, these tools aren’t actually always necessary. Don’t go signing up to a professional account as a beginner trader for the sake of extra features. It’s not worth the large deposit amount.
What is the difference between a micro and a standard account in forex?
In forex trading, account types are often based around trade volume. Trade volume is measured in lots, and refers to the amount of currency you wish to trade. Micro accounts, for example, allow you to trade micro or nano lots (1,000 and 100 units of currency respectively). Standard accounts, on the other hand, allow you to trade mini lots and sometimes even standard lots (10,000 and 100,000 units of currency).
What is the best forex trading account for beginners?
All beginner traders should start off with a demo account. This allows you to practice trading with zero risk. Many prospective traders stick to their demo accounts for at least six months, whilst they get to grips with the trading software and their trading strategy. After this time, micro/mini accounts are best for forex beginners. This is because they have a low minimum deposit limit and allow you to trade micro and nano lots.
What account types are there in forex?
In order to cater to all types of traders, the best forex brokers offer a variety of account types. The most common forex account types are based around trade volume, these include mini, standard and VIP accounts. Other popular account types include swap-free accounts/Islamic accounts, demo accounts, and social trading accounts.
How much money do you need to open a forex account?
The amount of money needed to open a forex account is dependent on what type of account you want to open. Some brokers allow you to open accounts for as little as $20 or even $5 dollars. Professional accounts, on the other hand, usually have a minimum deposit of around $10,000.
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.