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Trading Forex can be overwhelming sometimes, especially if you are faced with different Forex trading account types, each offering different features. That is why you should make sure that you are selecting the right account to suit your trading needs and style.
FX trading accounts differ based on the expertise required, minimum deposit needed, and access to the markets given. Many traders quickly rush into trading without checking these differences and end up being limited on trading options, therefore missing out on some trading opportunities.
Different brokers offer different types of accounts depending on the markets where they operate, and the financial instruments they offer.
In the following, we are going to explain what are the different types of Forex accounts, what each account offers, and which account will work best for you.
Before we dive into the main trading accounts, let us introduce some trading terms that will help us explain how most accounts differ. These terms can be misunderstood or overlooked, and it is important to learn them because they also involve some details which we will cover later in this guide.
Spread is the difference between the bid and the ask price of any tradable asset. It is a way for brokers to make their income, especially those who do not charge commissions based on entering and exiting the market.
The spread is one of the most important terms used in trading. Whether you are trading currencies, stocks, or any other financial instruments, you are going to see this word frequently.
When you trade currencies you are going to see two different prices, these are the buying or “bid” price and the selling or “ask” price, and the difference between these two prices is what we call the spread.
It is one of the main determinants relating to the different types of Forex accounts because it represents a trading cost. Some brokers do not charge a fixed cost for trading, but rather incorporate the cost in the spread.
The spread also determines how liquid an asset is, it is flexible and changes according to market activity and price fluctuations. Therefore, if an asset is highly traded in the market, the spread is more likely to tighten, and vice versa.
Another thing to mention in the spread is that it is measured by pips, where a pip is the smallest possible change in the exchange rate. In most cases, it is located in the fourth decimal position e.g 0.0001. This is also how brokers express how many pips are in the spread of an asset.
Leverage is another determinant of different FX accounts. This is an amount of money borrowed from the broker to improve the trader’s market position. It is expressed as a ratio of how much a broker lends out for each dollar a trader invests.
For example, if you are opening a market position with $1,000 using a leverage of 1:100, your trading capital will become $100,000, which enables you to place a high-value trade position.
This way, you multiply your gains if the trade is successful, and multiply your losses when things go south. Using leverage can land you in a position where you lose more money than you initially invested, causing you to be indebted to the broker and forced to repay the outstanding amount.
Usually, different Forex trading accounts allow different levels of leverage, because the higher the leverage is, the riskier it becomes, and the more skill it requires to trade these kinds of accounts successfully.
The allowed leverage depends on the license of the broker. The license regulations may limit the maximum leverage, for example, brokers regulated by CySEC can offer a maximum leverage of 1:30 on major Forex currencies. Unregulated brokers offer much higher leverage which can go as high as 1:1000, imposing a much greater amount of risk on the investor.
Another important factor that differentiates trading accounts is the number of units that are being traded, which is called contract size or lot size. The lot size is expressed in terms of units, and it is the number of currency units a trader is controlling in their market position.
The most used lot sizes are the standard lot (100,000 units), mini lot (10,000 units), or micro lot (1,000 units). In very rare cases, a broker may offer a nano lot which is (100 units). These lots can also be expressed as 1 lot, 0.1 lot, 0.01 lot, and 0.001 lot for the nano lot size.
The lot size determines how risky a trader’s market position is. To measure the impact of a one-pip movement for a standard lot size we can take use this formula “100,000 * 0.0001 = 10”. Thus a one-pip movement for a standard lot would equal $10. While for the micro lot size it is 10 cents.
In a nutshell, the bigger the lot size, the more impactful the movement of 1 pip.
There are different authorities that regulate these brokers. Once a broker is permitted to work under certain regulations they receive a license. Some examples of these licenses are FCA, CySEC, IFSC, and FSCA.
These licenses belong to different legislations in different countries, which makes some licenses more reliable than others. On the other hand, some licenses offer relaxed regulations which allow brokers to offer a variety of trading options to their clients.
Different licenses regulate markets in different regions, which causes some Forex trading accounts to limit certain financial instruments. In these cases, a broker might be limited in the amount of leverage they are able to offer or be limited to only offering stocks but no cryptocurrency trading, etc.
For example, the CySEC license regulates the financial market activities in Europe and limits the maximum leverage that a trader can offer on major currencies to 1:30, and 1:20 for non-major currencies.
Therefore, there are different Forex trading accounts that are based on different options allowed by different licenses.
Most brokers offer multiple types of different FX trading accounts, each of them containing different offers and limitations, based on the regulations they follow and on the expertise required to manage these trading accounts.
These are types of accounts that can be found with all Forex brokers. FX standard accounts can sometimes be called “classic” accounts or “gold” accounts. It is the type of account that is intermediate, mostly suitable for traders who have traded at least for one year, and want to develop their trading skills using the different features that are on offer.
It is usually not recommended for beginners to start trading using this type of account. Why? Because the Forex standard account may require a higher minimum deposit by the trader, which can be between $200 and $500.
These accounts usually offer wide financial instruments to be traded in different markets. The leverage can also be changeable depending on the licenses that regulate the broker.
The spread in this type of trading account can be moderate to high, depending on the other accounts that the broker offers. Usually, they have the same trading platforms used by other trading accounts to make it easier to move from one to the other.
The contract size allowed under the standard Forex trading account usually starts from a lot size of 0.1 or a mini lot, while some brokers set the standard lot size as the minimum contract size to be used when trading.
This type of Forex account is the best for beginners and those who are still learning and making their first steps into Forex trading. They carry a small risk factor and yield small returns for traders.
Therefore, it is a good way for newbies to get hands-on experience in trading with minimal risk, using a limited budget.
These accounts are called micro and mini due to the lot sizes a trader can use. They can differ in name from broker to broker and might be called things like “cent” accounts among others. Some brokers might even have Micro and Mini accounts separately.
Traders using these types of accounts can use 0.1 or 0.01 lot sizes also called mini and micro lot sizes. The market fluctuations here have minimal impact on the trading capital, which means it is less risky to operate these types of accounts.
For example, in the micro Forex trading account, a 1 pip movement equals 10 cents. Some Forex markets may fluctuate more than 20 pips per day, which means a total of $2 is swinging up and down per day, and $2 is usually not a big amount to lose when trading.
The minimum amount required by the broker can range between $5 and $100 and entirely depends on the broker’s regulations. You may also discover some brokers that have it as low as $1.
The drawback of this type of account is the spread. Most of the time the spread starts from a wider spread range, it can be from 1 pip to 1.5 pips, while standard and VIP accounts can be as low as 0.5 or even 0 pips.
These types of Forex trading accounts are used by experienced traders, those who have more than $10,000 or $20,000 to transfer as a minimum deposit to their trading account. With a contract size of 100,000 units, or a standard lot size to trade with.
The spread in the VIP FX account is usually set to a minimum. Here it can start from 0 pips to reward the trader for their huge deposits.
On top of that, the leverage on these accounts can be very high, anywhere from 1:1000 going up to 1:2000. However, some licenses limit the maximum leverage to 1:30. In this case, the user needs to certify that they are professional traders who can handle such a huge amount of leverage, this may include providing some proof of experience or passing some tests.
Additionally, if a broker charges a flat commission rate for trading using any other trading account, they usually waive these fixed commissions for the VIP traders, which may attract wealthy investors to the broker’s website.
ECN account stands for Electronic Communications Networks, which is a recent technology, called ECN execution, that passes your trades to the market without the need for an intermediary, or a broker.
Using an ECN Forex trading account, you can have live market price movements, high volatility, and access to a huge pool of liquidity providers that are connected to an anonymous server network. This way you are directly connected to financial institutions, banks, or other traders who are selling their market positions.
The reason ECN trading accounts are associated with high market volatility is that there is a huge amount of currency pairs traded, and brokers have no control over the spread they can offer to their clients. This high volatility can result in slippage because prices are changing at a very fast pace.
The main difference between ECN and standard accounts in Forex trading is the role of the broker. Classically, when you execute a market order, it goes to the brokers who decide whether they accept your order as it is, or requote it. This process creates some frustration since dealing desks result in delays and conflicts of interest.
However, spreads using these types of accounts can be better than the spreads offered in standard accounts. That’s because the spreads are directly derived from market volatility, without any markup by the broker.
This type of account is usually used by experienced traders. Volatility levels might not help you place stop-loss or take-profit orders, and regardless of how quick the execution time is, the prices change very fast. Your market position might be at a different price than what you saw half a second ago.
In addition to that, brokers usually charge a fixed commission for Forex trading using an ECN account, because they cannot set limits for fluctuations to offer a specific spread range.
As the name suggests, this account type of FX trading gives you direct access to the currency market, where you can execute any market order based on the live price movement, and the live bid and ask prices.
This type of account might look like the ECN trading account. In fact, there are many similarities between them and in both cases, the broker works as an agent that leads the trader to the market, where currency pairs are traded directly between market participants.
However, the difference lies on the other side of the trade. When you use a DMA Forex trading account, you are directly accessing the marketplace, and placing orders in the market books. While in the ECN account, you are connected to an anonymous server of liquidity providers.
This way, traders have higher transparency over the market prices and spreads, similar to OTC (over-the-counter) trading. Since brokers cannot control the spreads that exist in the market, traders can benefit from tighter spread ranges, without any requoting from brokers.
Therefore, brokers charge a commission for investors who operate under the DMA trading account, which can be in the form of a flat rate or a percentage.
There is a specific category of traders who look to trade Forex with swap-free accounts. These are investors who follow the Islamic faith and are interested in trading according to Islamic regulations and Sharia Law.
The regulations of Islam indicate that receiving or paying any interest rate is not allowed, under the premise that interest is the activity of lending money for an additional benefit, which is an invalid source of income.
Therefore, brokers have adopted methods that offer Muslim investors Forex trading solutions that comply with the Islamic faith, using swap-free accounts that do not charge or pay the trader any money from rollovers.
The minimum deposit required for these types of accounts is usually similar to the amount required for standard accounts. However, the spread ranges, and the market access, together with the leverage might differ.
The market access for these types of accounts might be limited as well because according to Islamic regulations, CFD trading is not allowed. Brokers who rely mainly on CFD trading, might need to limit some markets, and offer DMA Forex accounts instead.
The commission rates might be slightly higher using a swap-free FX trading account because using direct market access, a broker cannot control the spread. Therefore, a broker may impose their own fees for market entrances and/or exits as a service fee.
These accounts can be called “PAMM” or “MAM” and are often confused with social trading accounts. The PAMM Forex trading account is an account where the investor opens and funds the account, but it is entirely managed and handled by an account manager.
Additionally, these accounts are usually funded by multiple investors who meet on the same broker’s platform, and they choose their money manager based on experience and reputation.
In this case, the investors enter into a private contract with the money manager whom they trust to govern their investments. Keep in mind that the money manager is investing their own financial assets alongside the rest of the investors in order to avoid any conflict of interest.
The total pool of money collected from the money manager along with the investors’ money is traded as a whole. After that, the losses or gains are allocated between the participants according to their share in the total initial amount.
The MAM trading account in Forex looks similar to the PAMM fund, with the only difference being that the money manager can assign different risk levels, leverage, and traded lot sizes between the investors participating in this fund.
These types of accounts might not be found in the broker’s “types of accounts” section, so you may need to look for additional features or tradable funds to find these accounts if the broker offers them.
A demo trading account is used for educational purposes, and it allows traders to practice trading using a specific amount of virtual money that can be used for executing different market orders.
This type of trading FX is usually free. However, in some cases, it is unlocked only after you make your first deposit, and for a limited period of time if you still do not have a live trading account.
Using a demo account is practiced by both beginners and experienced traders alike. Beginners use it as a starting point to get hands-on experience with trading and to get familiar with the chart options, indicators, and how everything works in a safe simulated trading environment.
However, experienced traders also use demo accounts, but they use them to try out some trading strategies. They build and make some trials to test the effect of different Forex trading strategies, and record their returns in different scenarios before implementing them in a real trading environment.
In the demo trading account, you see spreads that are set by the broker in different currency pairs, and depending on the trading platform used for the account, you might be able to test the leverage, the indicators, and different market orders.
Our partner, XM, lets you access to a free demo account to apply your knowledge.
No hidden costs, no tricks.
The most common types of accounts in Forex are standard, mini or micro, and VIP accounts. These types of accounts offer different lot sizes, minimum deposit requirements, and different minimum spreads. Some brokers additionally offer ECN trading accounts or swap-free accounts which have different levels of market accessibility, and different rules for overnight rollovers.
Micro or mini accounts are better for beginners because they incorporate less risk. These accounts allow traders to use 0.1 or 0.01 lot sizes and therefore minimize the losses that a trader might face due to volatility. In addition, these types of accounts usually require a low minimum deposit.
The ECN Forex trading account passes the trader’s market orders directly to a pool of liquidity makers, which are other traders, financial institutions, and banks, resulting in more transparent market activity. On the other hand, a standard account might work like a dealing desk, where the broker’s impact is high on the investor’s market orders.
Both PAMM and MAM are private fund accounts funded by investors and managed by money managers. In a PAMM account, the money manager trades the entire amount of capital with all the participants having the level of market exposure. However, a MAM manager has the flexibility to adjust different risk levels and different leverage ratios for different participants.