When it comes to investing everyone thinks about the traditional forms of investing with minimal risk and guaranteed returns. But taking the risk after proper research is totally worth it as many beginners have found the forex market to be an attractive place for both trading and investment. We typically don’t think of forex as an investment as the global currency market operates differently from other financial markets. However, becoming a forex investor is possible with managed account services like MAM/PAMM accounts where professionals trade on your behalf.

This is a type of investment where you get to make profits without trading yourself. Whether you aspire to be a forex trader or an investor, the first step that you need to take to enter the forex world is signing up for a trading account.

This guide will cover all details about forex trading, the type of accounts available and the process for setting up your own forex trading account in detail. So, let’s get started.

What is forex trading?

Forex trading takes place in the decentralised currency market which operates on a global level through online trading platforms. Traders engage in the buying and selling of international currency pairs to make profits from price fluctuations. The price of a currency pair is based on the exchange rate of 2 currencies that are paired together and it keeps fluctuating due to the volatile nature of currencies. 

If we take the EUR/USD pair as an example, you will be buying the Euro by opening a long position when you expect its value to rise against the Dollar. If you expect the Euro to fall in value, you will be shorting the pair by opening a sell position. These are the basics of forex trading but there is a lot that you will have to learn, plan and analyse for carrying out the trading process.

What is a forex broker?

A forex broker is actually a platform provider as you cannot use a trading platform without opening an account with a broker that offers the platform which can be MT4, MT5 or any other trading softwares used for forex trading. The forex broker is also responsible for giving you market access by displaying the real-time prices of all trading instruments and allowing you to place orders. The execution of orders will be done by brokers either by functioning as a market maker or partnering up with banks and institutions (liquidity providers).

The trading conditions that you get will be based on the broker you choose. They will also be offering various trading tools to make the trading process easier. Since a forex broker gets different types of traders looking for favourable trading conditions as their clients, they will be offering different types of accounts to cater to the needs of every trader.

Now, let’s have a look at the Different types of trading accounts that forex brokers offer and how they operate.

1. Demo Accounts

A demo account is used to provide a risk-free trading experience to the users as they get to learn about the forex market and trading process without depositing actual funds. The demo account is very similar to an actual trading account but you will be trading with virtual funds to eliminate the risk of financial losses. This account is for anyone who wants to indulge in practical learning before trading with real funds or just wants to get familiar with a trading platform and tools.

Even experienced traders open demo accounts just for testing the trading conditions offered by a broker before signing up for a real account which is referred to as a live trading account. The trading conditions that you get on a live account will be replicated on the demo account and hence you can also use it for testing your strategies in real-time market conditions.  

• Mini or Micro Accounts

The mini or micro accounts are actual or live accounts where you will be using real money and placing actual trades in the live market. But the minimum deposit requirement will be less than that of a regular or standard account as with mini or micro accounts, you get to trade with smaller lot sizes, risking less money. This type of account is suitable for beginners who are not ready to take huge risks but still want to experience trading in the live market with a smaller amount of capital. Here you can place trades in mini or micro lots and trade with minimal risk.

• Standard Accounts

A regular trading account where you will be trading with the standard lots is referred to as a standard account. This is the most common type of account that is used for trading with actual money to make profits and earn as a forex trader. The trading conditions you get on a standard account will differ depending on the broker you choose for opening the account. 

The minimum deposit requirement of a standard account will also be different with different brokers but it ranges between $50 to $500. When you decide to open a standard account, you need to consider the trading cost while choosing your broker and make sure that the broker is regulated and reliable before funding your account.

• Swap-free accounts

Swap-free account is similar to a standard trading account but here swap will not be applied to the trade positions that are kept open overnight. This type of account is also referred to as an Islamic account as they are specially designed for Muslim traders who cannot trade on a regular account due to the application of swap or rollover fee on trades that are open for more than a day. Because swap rates are based on interest rate differential between the currencies any interest-based transaction is forbidden or Haram as per Sharia law.

The overnight positions opened on a swap-free account are not subject to any swap fee or interest but only a flat rate admin fee is charged as the cost of keeping the trades open. Thus, these accounts do not violate any Islamic finance principles and operate as Sharia-compliant trading accounts. But not all brokers offer these types of accounts and you will have to find an Islamic forex broker for halal trading conditions.

• Managed Forex Accounts

I already mentioned managed account services in the introduction and managed forex accounts are for those who want to get some market exposure without trading themselves. They can simply invest in MAM or PAMM accounts which are managed by professional traders with a profitable strategy and will make trading decisions on the behalf of all investors following them.

The MAM/PAMM account managers will be placing trades on their master account and it gets executed in the investor accounts at the very same time, making the trading process effortless for every investor. Managed forex accounts are perfect for those who want to make some passive income from trading and also for those who struggle to trade on their own due to a lack of knowledge.

With MAM accounts, the investor gets some control over the risk and in PAMM accounts, the risk and reward are proportional to the amount of funds you invest with an account manager or trader. One thing you can do to minimise the risk is to build a diversified portfolio by investing in different investors by choosing traders with sound strategies after considering their performance statistics.  

• VIP/Professional Accounts

The VIP or Professional Accounts are just bigger-sized accounts which are used by Professional traders who trade with a large amount of capital such as $10000 or more. The minimum deposit requirement for a VIP account will be different with different brokers and the criteria for being eligible for a professional account is a bit different from that of regular accounts which can be opened by anyone. The VIP account owners also get some benefits over other traders but the charges can also be higher.

Things to consider while opening a Forex trading account

When you are planning to open a forex trading account, firstly you need to find a suitable broker based on the type of account and trading conditions you want as a trader. This will be easy once you understand how each account type operates and what trading conditions would be ideal for executing your strategy with perfection.  You should also consider the trading platforms they offer along with the features, tools and services available on their platform.

Choosing a low-cost broker offering favourable trading conditions like tight spreads, low commission and fast order execution along with high leverage is important for minimising the trading cost and optimising the profit potential. The account opening process should be quick and hassle-free. You need to make sure that they have a responsive customer support team for addressing any issues that you may face or for asking any questions when you are in doubt.

Final Words

Picking your forex broker and account type is the first step towards trading success if you can make a wise choice based on your preferences and requirements. So, take your time to compare different options and choose the best one for yourself.