Choosing an Online Forex Trading Account Type

By: Michael Hiller

The foreign exchange market is becoming a buzz word all around the world. In these troubling financial times, people are looking for a solid market that has not been affected by the crisis and the Forex market is it. There are close to 4 trillion dollars traded daily in the Forex market, something that obviously makes it attractive to many financial institutions as well as individual traders.

Just like everything else in life, the Forex market has a negative side to it as well. It is a very risky market if you do not know what you are doing. One of the aspects of getting started in this volatile world of Forex is choosing the right kind of account to meet your trading needs. There are many account types, and each one has its advantages and disadvantages. Before you trade one dollar, it is important to make an educated decision about many different things such as how much money you can afford to risk, how you want to trade and with who, and many other necessary questions, one of the most important being what kind of account to use.

Here is a short overview of the available account types in the existing Forex market, as well as each kind's advantages and disadvantages.

Mini Trading Account

This type of Forex account is intended for newer traders or individuals who are not interested in investing large amounts of money. Mini accounts allow you to trade Forex with a minimal personal investment of anywhere between $250-$500. Most brokerages offer a 400:1 leverage on mini accounts, which enables the trader to make transactions of up to $10,000, while only making a minimal risk to the trader's personal money. This is an important point to understand in Forex. You can make a lot more money than you invested, but you cannot lose more than you have.

Pros:
 

* Small Capital Required: Anyone who has $250 to risk can trade Forex using a mini account. The reason being the very unique advantage of the Forex market, the leverage given to traders.

* Low Risk: All Forex experts will tell you to trade with a demo account before risking large sums of money. After you have done that, it is recommended to trade with a mini account as well. It is a good way to practice and examine your trading strategy's effectiveness, at a very low risk.

* Flexibility: One of the main principles of Forex trading is to have a risk management plan and to stick to it. With mini accounts, this is very easy to do. You can trade with many mini lots as opposed to one large lot, in which you risk a lot more money if your plan is not a good one.


Cons:
 
In the case of mini accounts, there really is only one disadvantage. It is true that you risk less, but just like everything in life “no pain, no gain”. The potential for profit is much lower than in standard trading accounts. Mini accounts that trade $10,000 lots can only produce $1 per pip of movement, as opposed to $10 in a standard account.

Standard Trading Account
 
This type of Forex trading account is the most common. That is not why it is called the standard account. The name is derived from the fact that with this type of account, traders can make transactions of the standard lot, which in Forex is $100,000. Like you probably know by now, the ability to trade lots of $100,000 does not mean you need to invest that entire amount. Standard accounts generally come with leverage of 100:1. This means that you only need to invest a capital of $1,000 to trade using a standard acount.

Pros:

* Potential for Gain: Since you are risking more money here, the potential for profit is also greater. With this type of account, each pip is worth $10, therefore, with a 100 pip gain, the trader can make a $1,000 gain. That is unprecedented in the Forex market with any other type of account.

* Perks in Service: As I am sure you can understand, when traders enroll in a standard trading account, the service they receive from the broker is different than when trading with a mini account. This of course is logical and is understood both from the trader's and the broker's perspective. These perks can include smaller spreads, as well as many other possible advantages.


Cons:

* Potential for Loss: This is an obvious down side of standard trading accounts, but one that must be said. With the possibility of gaining a large profit in a short period of time exists the exact flip side of the coin. If the currency makes that same 100 pips movement, but in the other direction, you are out $1,000. For this exact reason, standard trading accounts are intended for experienced traders who can also afford to risk relatively large amounts of money.

* Large Capital Required: The minimal amount of capital required to open a standard account differs between brokers. Some require $2,000, while others require $5,000 and even $10,000, which makes this type of account a very exclusive trading account type.


Managed Trading Account

Managed trading accounts are exactly like they sound. Trading accounts in which the trader contributes the capital, but the management aspect is performed by a Forex professional and not by the trader. When opening a managed account, the trader specifies the goals for the account, and the account manager attempts to reach those goals. There are two primary types of managed accounts:

1. Pooled Funds: With this type of managed account, your money is put into a mutual fund with the capital of other investors and the profits or losses are then shared. These accounts are categorized according to risk tolerance. A trader looking to make more money in a shorter period of time, will choose a managed pool fund account with a higher risk/reward ratio, while a trader looking for a more steady income will do the opposite.

2. Individual Accounts: These are of course accounts that are managed on a more individual basis and not in a collective pool of funds.


Pros:
 

* Professional Assistance: No matter how long you have been trading Forex, there are people that have been doing it for longer. It is always important to listen to other people's opinions on the market, especially when they are well known experts in the field. With managed accounts, you can generally count on the fact that your money is in the hands of an experienced Forex trader that will make educated decisions on what to do with your money and when.

* Freedom: Having your account managed by someone else leaves you the ability to gain from the Forex market without having to spend the time trading. You can spend your time doing whatever it is you do and rest assured that the experts managing your money will do everything in their power to help you see gains.


Cons:

* Price: This type of account comes at a very high price. The luxury of profiting from the Forex market while spending virtually no time doing it, will set you back $2,000 for a pooled account and up to $10,000 for an individual account.

* Lack of Flexibility: It is true that if you choose to have your account managed by someone else, chances are you do not want to or know how to do it yourself. However, with this type of account, you have very little flexibility to get involved. If you do for whatever reason want to open a position you think is a smart one, you will have to count on the account manager to see that position and make the smart decision. Having your account managed leaves you very flexibility.


The Forex market is a very popular and up and coming market. Many factors contribute to that popularity, with the primary one being its potential for profit. However, it is always important to remind yourself that that very same potential presents a grave danger, that if not managed properly can devastate even the most experienced trader. The first step in managing your Forex trading is choosing the suitable type of account based on your existing capital and risk ability.