Investor’s Guide to Forex Trading Accounts Types
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 trading accounts the broker offers and the trader’s trading style, the broker may or may not be selected. Rookie traders will do anything to start trading in the 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 rather than 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 characterised by extreme competition, and as a result brokers will use any strategy possible in order to attract as many clients as possible. As a consequence, in order to further differentiate the offers, brokers allow clients to choose from a multitude of types of trading accounts, based on each individual trader’s style.
These are to be avoided at all costs. They are still being offered by brokers who have failed to adapt to new technologies available in the Forex industry, and their main drawback is the fact that trading on the market is virtually impossible. Forex markets move really fast, and there are times when a trader wants to open a new trade or close one on the market. As a result of their using 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, the markets will have moved 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. One good thing is that there are no longer many brokers offering this kind of trading account; but if you do see one, it is to be avoided.
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These are the 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 sole 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 incur 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 will charge a commission for every trade .
Trading Accounts Based on Funds Deposited
Depending on the amount of funds deposited, brokers may offer different trading conditions. There are brokers who offer VIP accounts for, say, deposits over $20,000 or more, and they may offer customised spreads and costs/commissions if the amount is even bigger. A trader should be careful with the kind of offer though, as funds safety is the most basic essential, 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 types of Forex trading account is the swap-free account. A swap is a positive or negative amount that is added or deducted from a trading account after each trading day that a position is kept open. Traders who look to hold positions open for a long time, such as 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 these accounts come with no other costs, as either conditions to open such an account are prohibitive to the vast majority of retail traders, or other costs associated with normal trading are higher 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 thing.
The Value of a Pip
The difference between the opening and the closing price of a trade is calculated in pips. If this difference is, for example, 10 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 1 lot and another thing to trade 10 lots, as for 1 lot on the EUR/USD pair 1 pip is worth $10, and for 10 lots it is worth 10 times that much. 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. Traders are forever struggling to find the right balance between the funds in a trading account and the volume traded, in order for the pips won to make sense for a steadily 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 two of the most 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.