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|
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 account 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 strategy 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.