Different Types of Forex Accounts Explained , What Type of Account Is Best?
Opening a forex account is the very first step to start forex trading. However, as a beginner, you must start with a forex demo account, which will provide you a brief insight into currency trading. Besides, an expert trader also needs to start with a forex trading demo account to check a new broker.
Many newbies jump into opening a forex broker account without adequately understanding its offerings. Some of them become overwhelmed or get confused by different forex broker account types. Therefore, traders lost interest when they found their investments are not worth it.
When you want to open a forex account, you will need to consider various things, including your budget, trading strategy, goal, etc. So, choosing the right account type is an important step. Having said that, we have sorted out all the forex brokers account types you will come across in your forex journeys such as Forex Mini Account, Forex Micro Account, MAM, PAMM, LAMM, IRA Accounts, Segregated Accounts, Rollover Free Accounts, Islamic Accounts, and Scalping Accounts.
On this page, you will get to know:
- Overview of all forex broker’s account types, including their pros and cons.
- How to pick the right account for your trading.
Read on to know all the available forex account.
Types of Accounts for Forex Trading
Different brokers offer different forex account types. However, Forex accounts can be categorized into two types of demo accounts and live forex trading account. Forex demo account is the most common account type among all the account types, which is offered by all the brokers.
Besides, you will come across some other types of accounts too. Without further ado, let’s find out all the account types one by one.
Forex Demo Account
As a beginner, you should not start trading with real money. It is essential to practice through a forex trading demo account to get a real scenario of forex trading. All the brokers provide an opportunity to open a forex demo account for the trader’s convenience. Traders can practice on that account before investing real money from their pockets. However, the forex trading demo account will not get you the real money. A demo account is different from a real forex account. Let’s find out the benefits of opening a forex demo account.
Pros of a Forex Trading Demo Account
- On a demo account, you will not need to risk losing money as you are practicing with virtual money.
- You can get an idea of investing real money.
- You can practice until you gain enough confidence to trade with real money.
- Opening a forex demo account is free; however, it would be usable for a limited time. For example, some broker may offer you a month while some may offer a small amount of virtual money as long as you want. So, it is necessary to understand the conditions before opening an account.
- You can evaluate a broker before investing in it.
- When you are ready, you can switch to a live account.
Cons of a Forex Demo Account
- You will not be able to get the cash you earned from a demo account.
- You will not have the opportunity to trade all year round.
- There are some limitations, such as time frame, money, etc.
It is useful for both experienced and newbie traders. Novice traders can use the demo account to get a grip with numerous trading account types and platforms. On the other hand, an expert trader can test a new broker through a forex trading demo account.
Live Forex Trading Account
Apart from a demo account, all other types of accounts fall under the live trading account. A Live trading account needs deposits to start trading. Once the live account is funded with actual money, the trader can then start the trading.
Read on to know all the live forex trading account types.
Mini and Micro Accounts
Forex micro and mini accounts are usually for the traders who want to trade with a small number of capitals. These accounts are very useful for beginners who are still learning after trading with a forex demo account.
Forex Micro Account
A micro account is created for the retail investor who wants to start foreign exchange trading as a beginner; at the same time, he doesn’t risk a lot of money. It is best for the traders who just learned trading with a forex demo account. It is also called a micro lot, which has a preset amount of 1000 units of currency. Most importantly, it is best for totally new traders as the forex micro account doesn’t need a huge investment.
- It can minimize risk as traders can invest as low as 1000 units of the respective base currency.
- The minimum volume a trader can trade is a micro lot.
- Beginners can trade with a forex micro accountwithout any hesitation.
- Most of the micro account doesn’t force for a minimum deposit.
- Traders can start trading with a low amount, such as $50. With some traders, it could be less than that.
- For an immense gain, users need to have a heavily leveraged forex micro account
- The maximum volume transaction depends on the amount of equity in the account.
Forex Mini Account
A forex mini account allows smaller size trading quantities and positions; thus, reducing the potential losses by lowering the funds. Because of the smaller contract size, the mini account appeals to the new traders. Unlike micro account lots, mini account lots consist of 10,000 currency units, which is 10 times bigger than the micro lot.
- Mini account holders have access to the markets and tools, just like the standard account holder. For example, a mini account holder will get the regular trading platform and proper customer support and charts.
- Mini lots can provide a great forex diversification, such as; it can be spread to a greater number of currency pairs.
- Beginners friendly
- A typical deposit amount is between $100 and $500
- Traders can trade 10 mini lots at a time, including customizing trading, which provides greater risk control.
- If the currency pair makes a tiny adverse move, using leverage can cost a loss.
Except for micro and mini accounts, all other accounts are considered as a standard account. However, it may have different names for different brokers. Such as some may call it as Intermediate or classic account. Others may refer to it as golf or premium accounts. Having different names won’t change the purpose of the standard account.
Typically a standard account offers a fixed spread, though; it depends on the broker’s choice. This account allows a user to trade away higher that micro and mini lots of currency. A standard account may allow you to trade up to $100,000. This doesn’t mean that you will have to deposit $100000 to get a standard account’s benefits.
According to the margin and leverage rules, it is 100:1, which means only $1000 can get you standard trading. However, the new traders shouldn’t open a standard account who just completed practice with the forex trading demo account.
- Since a standard account holder needs to deposit enough money upfront; they will get more broker services than a mini or micro account holder.
- There is a potentiality to gain more profits. For example, with a $10 pip, if a position moves 100 pips in a day, you will gain $1000. This type of quick gain is not possible with other account types.
- Most of the broker wants a starting minimum balance of $2000 to open a standard account. Sometimes the amount may rise to $5000 to $1000 too.
- Besides the gain potential, you will have a huge risk of loss potential too. For example, if your position moves 100 pips adversely, you may lose $1000.
MAM, PAMM, LAMM
Trading with a forex demo account may seem profitable. But, it is indeed a risky business as the trader needs skills and experience to tackle the market profitably. As far as the overall profitability index, only a small percentage of traders can profit from the market. However, once you catch everything, you can earn the profit easily. Most of the forex traders don’t acquire the expected quality to run trading successfully. Therefore, a significant number of traders hire the service of established traders who offer managed account service and charge a fixed performance fee.
Brokers offer different types of managed accounts. Among them, MAM, PAMM, LAMM are the recognized ones. Following is the breakdown of these managed accounts.
MAM- Multi Account Manager
MAM accounts help to manage multiple trading accounts from a single terminal. It combines different individual accounts into a large managed fund from different traders and investors accounts.
- All orders executed from the master trading account which from MAM
- Individual account holders can also trade from their account if they wish. However, if anyone practised through a forex demo account, it is not advisable to trade their own.
- The performance fee is paid only when the master trader completes successful trading.
Account manager won’t give you any guarantee of making a profit.
PAMM- Percentage Allocation Management Module Accounts
PAMM allows traders to allocate a specific percentage of their trading capital to a master account to copy the trades. Unlike other managed account, on PAMM, investors can follow other traders account. Forex brokers, traders, and investors are involved in a PAMM.
- Investors can diversify their trading capital after looking at other traders.
- PAAM accounts offer multiple trading systems, and investors can hedge against any performance issues.
- The broker ensures a reliable platform with all the regulations so that investors can interact safely.
- Provide a secure, reliable platform that allows money managers and investors to interact.
- Despite putting all the money, investors are bound to follow all the offers by money managers.
- Investors have to carry all the losses. So, whoever has experienced only with a forex trading demo account, should not trade on their own.
- Money managers have the right to accept or deny new investors.
LAMM- Lot Allocation Management Module Accounts
In LAMM, traders allocate different amounts of trade lots to an individual investor’s account. Besides, the trader can take advantage of different leverage. On the other hand, profit and losses are calculated according to the multiple of lots invested.
- LAMM intends to lower the risk.
- It is suited for accounts with higher trading capital.
- The trader has full access to his funds, and trade can opt-out from a trading decision if he/she thinks it is vulnerable.
- The account manager doesn’t know the actual amount he monitors since he has access to his account only to trade.
- LAMM Manager doesn’t take any responsibilities of adverse outcomes. That’s why an investor should practice first with a forex demo account, they know the market with mini/micro account and finally hand over to the LAMM In this way, and investor, he can track the trading.
Individual retirement account- IRA is a tax advanced investing tool where individuals allocate funds for retirement savings. IRA accounts are mostly available in the USA. It also provides investors a chance to avoid taxation of their trading income, which eventually saved for the retirements.
Broker with IRA accounts has to follow many different rules and regulations than a regular broker. The IRS and US Treasury department exclusively develop those rules.
Usually, there are two types for IRA accounts in forex trading, Self-directed IRA accounts and Roth IRA accounts.
- Self-directed IRA Accounts- This type of accounts is opened and controlled by an individual, which also has access to the broker. However, the individual account holder controls the money and takes all the funding decisions.
- Roth IRA Accounts- These types of accounts are opened with the help of a broker, a bank, or a mutual fund. After-tax dollars are invested in Roth IRA accounts, and investors don’t need to pay any more taxes when withdrawn at their retirement.
Pros of IRA accounts
- Roth IRA account holder can avoid high tax bracket
- Investors can do day-trade, which is also tax-free.
- A self-directed IRA provides more control to an investor’s retirement plan.
- An annual fee is associated until retirement, besides some other fees charged by the brokers as custodian of your fund.
- Individuals have to pay penalties if they want to withdraw funds before their retirement.
However, IRA accounts don’t have any involvement with the forex trading demo account as investors are trading directly.
It is a particular type of forex trading account that keeps a client’s asset separated from the broker’s company fund. Brokerage companies usually have segregated accounts to keep everything fair with the client’s fund. Besides, these account types ensure that the money from different groups and clients is not used for wrong purposes.
- Segregated accounts give security on the trader’s funds as everything remains transparent.
- A client’s money and investments are correctly and easily managed in segregated accounts.
- When a broker trade with a segregated account, it helps in tax management.
- Strictly regulated by different forex regulatory bodies, so that your fund remains in the right hand.
- There are no visible cons that have been found for forex trading on segregated accounts.
ECN accounts don’t have any slippage and no intermediary banks. On the other hand, market participants can interact directly, where traders have an opportunity to estimate the volumes of applications.
In the ECN account, the trader doesn’t need a large volume as high liquidity is achieved because of the quantity.
If any traders want to move to real trading from a forex trading demo account, they can easily start with a cent account. The amount a trader deposits to a cent account is in cents, not in dollars.
It minimizes the risk for new traders who are still learning on the forex demo account. So, losing cents won’t affect your financial standing. At the same time, you will have learning opportunities in live trading.
In scalping accounts, traders hold a currency for a short period to generate a profit quickly. A scalper usually makes a large number of trades for a short time and makes profits from a small piece of movement. However, they capture small gains, for example, 5 to 20 pips per trade. But, they can magnify the profit by increasing the position size.
- Since traders hold the position for a short time, they can make multiple trades in a day.
- A small price movement in scalping accounts keeps the risk lower, but a significant amount of money is needed.
- Sometimes traders cannot be getting out of five pip loss.
- If the commissions are too high, the expected successes from scalping accounts are greatly diminished.
Usually, Scalping accounts don’t offer a forex trading demo account, so one needs to have immense scalping trading expertise.
Some Other Types of Forex Accounts
There are some other types of forex accounts available in the market, which the traders also use.
Rollover Free Accounts
Rollover free accounts are also known as swap-free accounts specially intended for Muslims who don’t want to receive swaps. Muslims are not allowed to receive interest according to their religion. So, rollover free accounts provide benefits to Muslims without the adjustment for swaps.
Usually, a forex swap or rollover is commission or interest charged by a broker for extending a trader’s position overnight. So, trading results depend on exchange rates only for a particular time frame.
- Trading on rollover free accounts doesn’t need a commission. Besides, there is no overnight charge applied for holding a position until the next day.
- Rollover free accounts are good for long term trading strategies.
- Instead of paying any rollover commission, traders have to pay a one-time charge or commission, which decreases the trading cost.
- A swap-free account has a higher minimum investment amount with lower leverage.
Rollover free trading account is created for Muslims. However, anyone can use this type of account. On the other hand, some brokers offer a forex trading demo account based on swap-free trading. It helps a trader to know how the swap-free transaction works.
Forex trading is based on interest or commission, which is earned from currency trading. However, according to the Islamic Sharia law, accumulation of interest is prohibited. Because of that, despite having a strong wish, practicing Muslims couldn’t participate in forex trading. Keeping Muslims in mind, different forex brokers come out with a solution, which is Islamic accounts. It is a halal trading account which runs on different rules than a regular forex trading interest-based rules.
Benefits of Islamic Accounts
- No interest or swap charges for overnight position extending, and with some brokers, the position can be held without time limits.
- There is no spread widening in Islamic accounts, as well as no upfront commissions.
- Real-time market execution.
- Traders will be able to open positions without extra charges in some currency pairs, in which swap or rollover costs are very high.
Disadvantages of Islamic Accounts
- Although a broker doesn’t charge any interest, they charge a fixed administrative cost, which is usually higher than regular rollover cost.
Since Islamic accounts work differently than a regular account, a trader must try it with a forex trading demo account for an Islamic account. Almost all the Islamic brokers offer a forex demo account for the user’s convenience.
How to Choose the Right Forex Broker Account Type?
After doing active trading and from our experience, we have found some basic standards to choose the right forex account. However, above all, we always encourage trade with a forex demo account. The following are our preferred criteria to choose a specific account type.
- Deposit Amount
The deposit amount should be the main criteria before choosing a forex broker account. As we have discussed earlier, the account types with their minimum deposit amount. If you just get out of the forex trading demo account and want to minimize risk with low investment, you should go for the mini and micro-accounts. On the other hand, we suggest a standard account for the high investments.
- Risk Factors
A trader with high risk-taking capability can go for a standard account, otherwise go for managed accounts. Besides, conservative traders who practice on the forex demo account should not take high risk and should go for small lots.
- Trading Tools
Traders, who practised on the forex trading demo account, don’t access all the advanced trading tools. So, for learning opportunities, choosing a broker with advanced tools accessibility will be best. For that, choosing a standard account is advisable, and the trader can invest less money to reduce the prospective losses.
No matter what broker you choose, it is always wise to try with the forex demo account. As forex trading demo account helps to gain ample experience. However, if a trader has a potential investment with vast experience should probably opt for full forex accounts.
As a basic rule of thumb, no one should put money on a broker that feels fishy. Although, all the broker account types listed on our website are legit.
Choosing the type of forex account depends on the trader’s tolerance for risk, size of the initial deposit, and the daily trading limits.
Top Rated Online Best Forex Brokers 2024