Different Types of Forex Accounts
If you are looking to trade forex online, then you will have a few different account types to choose from. These are demo accounts, cent accounts, micro accounts, mini accounts and standard accounts. This may seem confusing at first but it is really simple when you understand what each account does. That is what we will aim to explain for you in laymen’s terms so that you can choose the correct broker accordingly.
Forex Demo Accounts
Forex demo accounts allow you to practice your trading strategies without any risk. You can get a free demo account with most forex brokers who will usually let you choose the account balance and leverage that you wish to trade with. This can be an excellent way to improve your trading skills and build your confidence without needing to make any investment. Once you start having success on frequent basis, you may then consider taking a step up to the next account type (cent account).
It is worth pointing out that demo accounts do not always take into account liquidity levels which can have an impact on forex strategies that are very dependant on quick execution speeds, such as scalping systems. The spreads can also be artificial so do not expect the exact same conditions if you do eventually make the switch over to a live account.
Forex Cent Accounts
Also known as micro accounts, the forex cent account lets you trade with real market conditions but using a minimal investment amount. Most brokers that provide cent trading accounts let you get started with just $1. This is because the position size is so small you can still buy and sell currency pairs as you would with a standard account, just on a smaller scaler in comparison.
I think cent accounts are good for learning how to become a disciplined trader and controlling your emotions, things that are not always evident when trading on a demo account. Whilst the risk may be lower, the profit potential is also limited as your lot sizes are restricted on this account type. If you want some of the benefits of the cent account but the ability to trade larger lot sizes, you might want to look at the next account type (mini account).
On a cent account, 1 lot size is 0.01 standard lots or 1,000 units. This is equivalent to 0.0001 lots or $10. For a standard account, this minimum trading volume of 0.01 lots would be equivalent to $1,000. Cent account brokers will cap the lot size and may charge higher spreads on this account type so it does not always work out the cheapest.
Forex Mini Account
The forex mini account is very similar to the micro account, although it enables you to trade a larger position size. You can still make a small deposit and trade small positions sizes, but if you want to take things closer to the standard account, then this might be the forex account type that you want to consider.
A mini forex lot is one-tenth the size of a standard lot. That means a mini lot in forex is worth 10,000 currency units. The size of a mini lot means the profit and loss effect is lower than a standard lot which is 100,000 units. One pip of a currency pair based in U.S. dollars is equal to $1.00 when trading a mini lot, compared to $10.00 when trading a standard lot.
A mini account allows a trader to diversify investments, as they can open smaller-size trades. Let’s say, traders’ financial capabilities allow them to trade 1 market lot. At the same time, the same amount can be used to trade 10 mini-lots by distributing the capital among several currency pairs. Such diversification reduces risks and allows a trader to set a trade size more accurately.
Forex Standard Account
This is the “go-to” account for most forex traders who want a good balance between the minimum deposit, lot sizes and trading conditions. This account will typically provide the best trading conditions including tight spreads, low fees and the fastest execution speeds – especially when using an ECN forex broker.
However, the minimum deposit can price some traders out as the average is around $200 or even more if you want additional account benefits. If you can meet the minimum threshold, you can still trade smaller lot sizes as low as 0.01, which is similar to if you opened a micro or mini account. The standard account just gives you more flexibility if you wish to increase your position size over time.
A standard account lot is 100,000 units. 1 That is a $100,000 trade if you are trading in dollars. Trading with this size of position means that the trader’s account value will fluctuate by $10 for each one pip move. This means even small price fluctuation in the volatile forex market can cause large profits and losses.
Conclusion: what forex account type is right for me?
This really depends on what your current experience level is, your investment size and how you want to trade. If you are a complete beginner, you can practice trading without any risk by using a demo account. Some may argue that even new traders should at least start on a cent account to get a feel for trading in real market conditions. That isn’t a bad idea when you consider that you can open a cent account with as little as $1.
If you already have experience trading online and a substantial amount to invest, then you might want to look at a standard forex account. This is because they tend to have some of the best trading conditions in my opinion. It will also enable you to trade lot sizes that may be more aligned with your financial goals and experience level.
Some brokers will provide high leverage which will allow you to control a larger position size than you would to otherwise. Just be very careful as there are pros and cons to trading with leveraged positions.
Whatever account type you want to use, most brokers will have most of them available for you to choose from. This means it can be easy to make the switch to different account types depending on your current circumstances.
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