It is true that the forex market can be quite a lucrative investment avenue and can help to diversify your investment portfolio. However, just as all investment strategies are replete with risks, there are various risks associated with the foreign exchange market too. In fact, if you are a newbie and are just starting off in the forex market, you need to learn your way around before you begin to start investing the big bucks.
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One of the main things that you will require to start trading in the forex market is a forex trading account. Without a forex trading account with a good forex broker, you will not be able to put your trading strategies in place so as to profit from the foreign exchange market. There are different types of forex trading accounts that you can choose to open. The choice of which account to go with will depend on your level of risk tolerance as well as the capital that you have to invest in this market. This article offers a comparison between various forex trading accounts, which will help you to decide which type of account is ideal for your investment purposes.
Types of Forex Trading Accounts
Demo trading account
- As the name suggests, a demo trading account is not a live trading account but is available for demo purposes. While most people may believe that demo trading accounts are only for people who are just starting off in the forex market, the truth is that these accounts can be extremely useful for professional forex investors too. Here are some of the benefits you can get by opting for a demo forex trading account:
- Use it as a way to test the trading platforms of various brokers: The forex trading platform, which is provided by various forex brokers, is what you will need to use to put your trading strategies in place. Brokers offer different types of trading platforms that have their specific pros and cons. Therefore, before you put real money into the forex market, it is always advisable to have some type of familiarity with the trading platforms so that you know exactly how to use them. This can be accomplished by choosing to have a demo account. Not only can you understand the trading platform better by working on it through a demo account, but you can also test the platform with your specific trading strategies to ensure that it is the right type of platform for your specific investment requirements.
- Use it as a way to test your trading strategies without risking real money: People who trade in the forex markets typically test their trading strategies and plans before employing them in the live forex market to ensure that they actually work. Having a tried and tested strategy for trading in the foreign exchange market is the ideal way to profit from the market. Yes, it is true that tried and tested strategies too may lose you money in live trades, but not testing your strategies thoroughly before you start investing could lead to immense losses. Therefore, by choosing to work on a demo trading account, you can test your strategies completely without losing any real money while doing so. Since demo accounts usually offer all the same features and simulations of live accounts, you should be able to get quite an accurate idea about how your trading strategies will work. Once you have tested your strategies with a demo trading account, you can then move on to paid trading accounts and begin investing with confidence.
- Demo accounts are free: Since a demo trading account is free and does not require you to incur any costs, it can be the ideal way to begin your forex trading journey, without risking your investment capital until such time that you are confident to trade in the live markets.
Mini forex trading account
- A mini forex trading account is one that allows you to trade in mini lots. While the size of a standard trading lot for the foreign exchange market is 100,000 units, the size of a mini lot is only one-tenth that. Therefore, with a mini trading account, you get to trade in lots of 10,000 units rather than the standard lots which are much bigger in size. Here are some of the benefits of this type of forex trading account:
- Lower risk exposure: This type of account is ideal for people who are newbies in the forex market so that they can try their trading strategies with smaller lots that expose them to a lesser degree of risk. Even if you have been trading in the forex market for a long time but your risk tolerance level is quite low, then a mini trading account could be ideal for you as it enables you to manage your risk better than standard accounts.
- Lower initial deposits: The initial deposits for mini trading accounts are lower than what you need to deposit for standard trading accounts, which is useful for people who want to start off with a small capital. Since there is no limitation to the number of lots that you can trade with mini trading accounts, you can simply trade multiple lots to increase your exposure as and when you become comfortable with your trading strategies and build higher trading confidence.
Managed forex trading account:
- With this type of forex trading account, you will be the owner of the account but it will be managed on your behalf by a professional money manager. While it is the manager’s duty to come up with trading strategies that result in profits, these strategies are based on your individual goals and are tailored to your specific investment needs. You have the freedom to decide how to invest in the forex market and can ask your manager to follow your guidelines. However, most people who go in for managed trading accounts let their managers do most of the work and oversee it to ensure that it is in line with their goals. You will have to pay a certain fee to hire the money manager. This is why managed trading accounts are ideal if you have a bigger exposure to the forex market, so that your potential profits can be big enough to cover the fee for the managed trading account.
Standard Trading Account
- Also referred to as the full forex trading account, a standard account is one that enables you to trade with the standard lot size, which is 100,000 units. Not only does this type of account have a higher initial deposit, but you also have to develop your own trading strategies and the risk level is very high. Due to all these factors, a full forex trading account is typically considered ideal for people who have been investing in the forex market for a long time and who have the capacity to expose themselves to greater risks.
- As is evident from this comparison of different types of forex trading accounts, your choice of trading account will be determined by your risk tolerance and also your starting capital. It is quite common to go through most of these types of trading accounts on your way to becoming a professional forex trader from a retail one.