Once you feel comfortable with your knowledge of the FX trading world, you have to choose a broker before you can commence FX trading. You will have to make a choice regarding the type of account you wish to open with your broker. There are three primary account types – mini, standard and managed, and each come with its own advantages and disadvantages. The account you choose is dependent upon the amount of time you have available for trading on a daily basis, your initial capital investment and your risk tolerance.
The FX Trading Mini Account
This type of account allows you to make trades in smaller lots. A mini lot is equal to $10,000. Many brokers offer mini accounts as a method of attracting clients who are newcomers to the market and who may be nervous about trading full lot sizes due to the amount of capital required to do so.
- Low capital. Mini accounts can be opened with an amount as low as $250 and the leverage offered is normally quite high at 400:1
- Low risk. By allowing trade in $10,000 lots, newcomers to the market can trade without wiping out their accounts. It also gives them the opportunity to try different strategies without the worry of losing a lot of money
- Flexibility. To be successful in this market, you have to establish a risk management plan and maintain it. Mini lots give you the chance to do this. If you find that one standard lot has become risky, you could buy a few mini lots to reduce your risk.
- Low rewards. With a mini account, you will realise a $1 profit for each pip in a positive trade. A standard lot offers you $10.
The Standard Trading Account
This is the most common trading account. You will gain access to standard lots which are equal to $100,000. This does not imply that you have to invest $100,000 to trade. Margin and leverage gives you the opportunity to trade a standard lot with a capital investment of around $1,000.
- Gain potential. Each pip in this type of account is worth $10. This gives you an opportunity to make huge daily profits with positive positions. If you have one position that is profitable and moves by 100 pips in a day, you could gain a profit of $1,000 for the day. It is not possible to accomplish this with other types of accounts, unless you trade more than one lot.
- Service. A standard account requires a higher capital investment to allow you to trade full lots and this prompts brokers to offer you better services and more perks if you open this type of account.
- Loss potential. As you are able to gain $1,000 with one position in your favour, you could also lose that same amount if the position moves against you. This type of loss could adversely affect your account, particularly if your initial investment was not that high.
- Capital required. Forex brokers normally require that you invest an initial amount of a minimum of $2,000. This amount may even go as high as $5,000 or $10,000, depending on the brokerage.
Standard accounts are generally recommended for traders with experience and who have the capital to invest.