Why You Need a Forex Account to Trade
A Forex account is necessary to trade as it connects you to the market. It allows traders to analyze currency pairs, determine profitable trading opportunities, buy, sell, and hold assets to increase your account balance consistently over time. Without a Forex account, this would not be possible. Regrettably, many traders rush into trading before acquiring the necessary knowledge base, partially due to overly aggressive marketing by Forex brokers who make it sound deceptively simple in an effort to attract deposits.
One of the most significant advantages of Forex trading is the relatively low capital requirement necessary to commence trading. It is also highly leveraged but needs to be correctly understood. Where the math on paper looks excellent for even a portfolio with $1,000 and leverage of 1:30, live trading won't be successful without a specific skill set including knowledge of strategy, the right attitude, and experience, which many new traders fail to acquire. It explains why some studies suggest the average lifetime of a Forex account is between four to six months for active traders. Regardless of the outcome, you need a Forex account to start. 
How You Open a Forex Trading Account
With the rise in online Forex trading, a swift application generally processes new accounts, granting access to the back-office. Depending on the jurisdiction of the broker, a questionnaire may enquire about employment, income, savings, and experience. The depth of questions can vary, and the first step of opening a Forex trading account sometimes consists of as little information as a name, e-mail address, and password
Regulated brokers need to be compliant with anti-money laundering (AML) and know your client (KYC) requirements. This step is mandatory, and traders should avoid brokers who do not require it, as the likelihood of a scam there is extremely elevated. Some applications include the entire process in one form. Others grant a trading account with limited functionality, including the ability to deposit funds and require the AML/KYC step afterward. The best approach is to wait for full verification before proceeding. In most cases, it takes as little as a few minutes, depending on the technology deployed. Manual verification can take up to 24 hours in rare cases, but brokers attempt to process them as quickly as possible.
Forex Basics: Setting Up an Account
The Forex market is the most liquid financial market in the world, with daily turnover reaching $6.6 trillion as of April 2019, the latest official data. It continues to grow in popularity with a steady inflow of new retail traders competing against banks, hedge funds, and other institutional traders. Technology fulfills a crucial role across the board and set to revolutionize Forex trading moving forward, leveling the playing field for market participants, and increasing the consistency as well as profit potential. 
Regardless of the grouping, all market participants require a Forex trading account to become an active participant. The three primary account types are the standard account, the mini account, and the managed account. Various factors, like the size of your portfolio, risk tolerance, and time will play a deterministic role in the account selection process. Access to a specific technology, sometimes provided by your broker, or willingness to invest will also impact where you will open which account type.
Another essential factor is the type of trader you are, as each account type carries unique advantages and disadvantages. New retail traders require a mini account with a broker featuring an extensive educational section and access to proper research capabilities, either in-house or sourced from third-party suppliers. Advanced and professional traders will manage capital in the standard account and a broker with necessary upgrades to the core trading platform together with auxiliary support services for automated trading solutions. Time constrained traders will require a managed account, generally provided in the retail sector via a percent allocation management module (PAMM) account. A social trading platform or one with third-party support for it may be an alternative.
Standard Trading Accounts
As the name suggests, this is the primary trading account at the core of Forex brokers. One standard lot equals 100,000 currency units. Therefore, if your account base currency is in US Dollars, the pip value for each currency pair where the US Dollar is the quote currency equals $10. A pip is the fourth decimal in a quote, and the quote currency refers to the second one listed in a pair. Examples include the EUR/USD, the most traded currency pair, the GBP/USD, the AUD/USD, and the NZD/USD.
To trade one lot, you do not require a deposit of $100,000. Forex traders rely on the use of leverage. The amount depends on the broker’s jurisdiction, with CySEC-regulated brokers forced to cut it to 1:30 for retail traders, ASIC grants the typical maximum of 1:500, while some brokers market 1:3000. Leverage is one of the most misunderstood concepts of trading, as evidenced by the lack of understanding by regulators. While high leverage is confused with high risk and loss potential, it is a misleading statement. The absence of proper risk management is responsible for it, with the 2008 global financial crisis the latest example. Additionally, the deployed leverage is usually well below the maximum.
The Pros
Forex brokers who do not offer the same service to all traders, a slowly fading trend across the industry, usually provide superior pricing and additional services for standard trading accounts. It also represents the account type eligible for VIP upgrades, once traders satisfy certain balance thresholds. The profit potential is also significantly elevated, allowing advanced and professional traders as well as portfolio managers to earn more per trade. A 100 pips move results in a profit of $1,000, using the above metrics. While the math on paper looks appealing, numerous variables will impact the outcome. Trading is a demanding profession, and the standard trading account caters to it.
The Cons
Funding requirements are the biggest hurdle for traders. Some Forex brokers are offering standard trading accounts for as little as $500, with a more reasonable request at $2,000. While this is attainable by most retail traders, using an account balance below $25,000 with a lot size of 1.0 adds significant risk. Equal to the magnified profit potential, traders face an increased potential loss. A 100 pip move against your position will result in a $1,000 loss. The minimum lot size is usually set between 0.01 lots and 0.10 lots, allowing for greater flexibility, but for that purpose, a mini trading account is better suited.
Mini Trading Accounts
This is the ideal choice for most retail traders, especially with a deposit below $10,000, due to the reduction of the lot size to $10,000 with a pip value of $1. It often comes with higher leverage than the standard trading account. A typical minimum deposit of $1,000 allows traders to diversify portfolios and micro-manage their risk profile effectively. Many brokers require a smaller minimum deposit, but the lower the deposit in a highly leveraged account managed by a new trader, the higher the risk of loss.
Several brokers offer micro trading accounts, where the lot size totals just $1,000, and the pip value resembles $0.10. It is an ideal substitute for a demo account, as traders will be able to learn how to trade in a live trading account with a small deposit of $100 or less. Mini trading accounts are not only the proper selection for most retail traders. Professional traders often use it to test new trading strategies or to test automated trading solutions in a final step before deploying them into standard accounts.
The Pros
The low capital requirements, in conjunction with higher leverage, creates a very efficient combination for retail traders. It promotes incremental portfolio growth and allows for increased learning potential. Given the added flexibility to diversify trading strategies and manage risk effectively, the majority of non-professional traders should trade a mini trading account, which does not punish errors as harshly as a standard account does.
The Cons
With significantly reduced profit potential, for the same amount of research, it is ill-suited for well-funded portfolios. Growing your balance with a mini trading account requires time and patience, a fact most Forex brokers fail to mention. It can be frustrating at times, but it is the correct approach to Forex trading, where patience is paramount to increasing your portfolio over time, which magnifies the profit potential.
Managed Trading Accounts
Individuals who have the capital and desire to deploy funds into the Forex market but lack the time or interest to analyze assets and manage their portfolio, will find managed trading accounts appealing. They are either directly operated by the Forex broker, in rare cases, while the bulk of retail asset management takes place through a percent allocation management module (PAMM) account. It is managed by third-party asset managers or qualified individual traders, under the supervision of the broker.
PAMM accounts cater to different objectives, and investors can choose between a variety of offered risk profiles. Forex brokers offer precise statistics, making the selection process easier. Several third-party websites exist to independently confirm performance if the manager participates. Social trading, although down from its peak popularity a few years ago, represents another alternative for investors to diversify their assets without the need to manage. The retail favorite MT4 trading platform supports this through countless third-party plugins, while automated trading solutions have entered the management sector, also available from the MT4 Market inside the trading platform. It enables Robo-Advisory firms to gain market share from traditional managed trading accounts, a trend anticipated to accelerate over this decade.
The Pros
It offers investors the freedom to select several asset managers, diversify their portfolio and risk profile, without having to learn how to trade or spend hours analyzing and watching markets. Finding the right asset managers can pose a challenge and should not be rushed. Proper choices will place the desired capital in professional care, and investors must not underestimate the long-term benefits.
The Cons
Minimum deposits for managed trading accounts can exceed $10,000, and portfolio managers charge a performance fee. Investors also give away the ability to make trading decisions if they recognize an opportunity and rely entirely on the portfolio manager or team tasked with managing the account. Smart diversification is essential, and one account should remain under personal management.
Forex Brokers
Selecting the right Forex broker is one of the most essential tasks for successful traders, and also a somewhat challenging one. The popularity of Forex trading across the globe has attracted numerous scammers, and even well-regulated brokers use misleading marketing campaigns about their products and services to lure in new retail traders that are unable to understand the difference. When choosing a Forex broker, it's important to check that their regulation is valid, because some less-scrupulous brokers claim to have regulation that has lapsed or been rescinded.
The UK FCA is one of the most trusted and influential global regulators, expected to widen its dominance on the financial regulatory sector following the end of the Brexit transition period. From 2021 it will be free to set oversight rules and break free from the counter-productive EU regulatory framework under the Markets in Financial Instruments Directive (MiFID II) enforced by the European Securities and Markets Authority (ESMA). It materially reduced the competitiveness of Forex brokers operating out of Cyprus under the oversight of the Cyprus Securities and Exchange Commission (CySEC). It was the go-to country for a bulk of retail Forex brokers but has lost its edge.
In the present Tier-1 regulatory environment, the Australian Securities and Investments Commission (ASIC) maintains the most competitive set of rules, equalling that of FCA and CySEC before MiFID II. Regrettably, a prime regulator is no guarantee for a safe trading environment. Over the years, many Forex brokers have been fined for non-compliance, even though they ultimately maintain their regulation. There is also a growing number of Forex brokers who opt for regulation in a friendlier jurisdiction to remain competitive, enhanced with an alternative approach to the safety and security of clients.
Leading the push into alternative, but effective, self-regulation is the Hong-Kong-based Financial Commission, the world’s first independent self-regulatory organization and external dispute resolution (EDR) body, dedicated specifically to Forex. Traders are protected up to €20,000 per case through the Compensation Fund, placing it on par with CySEC-regulated entities. Other services include trade execution certification, liquidity and brokerage solutions, real-time dealing risk management, and access to an invite-only registry by DisputeWatch, designed to prevent fraud. Members also receive actionable market research free of charge together with pre-and-post-trade execution analytics. All additional services are in cooperation with third-party organizations and firms, granting a broad web of industry-specific solutions for Forex brokers. Therefore, the combination of services offered makes it a superior solution to the traditional approach to regulation.
How To Choose
A Forex trader doesn't necessarily have to pick the Forex broker he has his demo account with, but it definitely is more convenient. What this does is allows the Forex trader to switch back and forth between his demo account and his Forex real account seamlessly.
But if one wishes, the Forex trader should always choose the Forex broker who offers the services that fit his needs. That doesn't have to be the one he started with. As a matter of fact, Forex traders have been known to change Forex brokers. It's not a lifetime commitment.
The most important thing to understand is that opening up a Forex real account is like opening up the front doors to a new business. It's exciting, thrilling, and scary. But with the proper preparation, it is not daunting. This is your profession; your business; and you should treat it as such.
A Forex real account is the beginning of a long process. Handled properly, it will be a profitable one as well.
Bottom Line
Trading from the right Forex account type will have a tremendously positive impact on your portfolio. Most retail traders will find ideal trading conditions in a mini trading account, especially with MT4 Forex brokers. Aside from smaller minimum deposit requirements and higher leverage, technology enables the use of social trading and automated trading solutions. It allows for smart diversification opportunities, reduces risk, and increases the overall profit potential. A hybrid account, which incorporates managed accounts, offers traders a superior multi-faceted approach. Never invest money that you cannot afford to lose into a product that you are not comfortable with, that you do not fully understand, or feel pressured into via aggressive marketing. Take your time, be patient, find the most acceptable solution to your need, and build a profitable approach to Forex trading.
FAQs
What is the best Forex trading account?
It depends on the type of trader, but most are best served from a mini trading account where each lot equals $10,000 with a pip value of $1.
What is an ECN account?
An ECN (electronic communications network) account grants traders superior pricing with raw spreads, but it is offset by a commission per lot. It is ideal for high-frequency traders, but generally only available as a standard account.
Can I have two Forex accounts?
Yes, there is no limit on how many Forex accounts or brokers you can have.
How do I open a Forex account?
An online application at the broker of your choice handles the first step. Account verification is a mandatory second step with regulated brokers to comply with AML/KYC requirements. A copy of the trader’s ID and one proof of residency documents usually satisfies this step.