Just as banks offer several types of bank accounts catering to the diverse needs of their client base, the same logic applies to trading currencies.
Every trader in their journey will come across various accounts aside from the standard demo and live, all with different features and requirements. This article will outline all the main trading accounts within the forex, their purposes, who they’re suitable for, and their advantages and disadvantages.
Pros and cons of demo accounts
The demo account is the introduction all new traders have in currencies trading. It is a simulated account of the real markets where someone can open positions as they would in a live setting without any monetary risk.
Essentially, the demo account is a trader’s training ground, where they can spend several months or years honing their skills in preparation for the live markets.
- Demo accounts are essential for practicing, back and forward testing and the overall navigation of a trading platform. Essentially, these are the primary purposes.
- Unlike in live environments where mistakes are often irreversible, traders can always reset their demo accounts to correct any errors.
- Traders don’t fully master their psychology in the demo stage.
- The market conditions on a demo account are not 100% like a live account in terms of spreads, volatility, etc.
- Many demo accounts don’t allow traders to set a realistic starting balance that would align with what they would probably fund in real life.
Pros and cons of standard accounts
After passing the demo stage, the logical next step for most traders is signing up for a standard account. At this point, one should be well prepared and have proven profitability on the demo for a sufficient period.
All forex brokers offer the standard live account. Here, clients can open positions starting from 0.01 or 1 mini lot with competitively low spreads.
The leverage is relatively high, ranging anywhere from 1:100 to 1:2000 in some cases. Most demo accounts are based on settings of a standard one. Therefore, new traders would be familiar with this account type.
- Standard accounts are simple to understand and come with no frills.
- The spreads are often reasonable, and brokers can employ the highest leverage possible.
- No extra commission should apply.
- The one major pitfall with standard accounts is their lack of ineptness towards cash-strapped traders. While many brokers accept deposits as low as $10, these are technically not suitable for standard accounts as the minimum lot size is always 0.01.
Also, currency pairs have different minimum margin requirements that increase the amount of money a trader needs to maintain a position.
- Standard accounts all rely on variable spreads that aren’t always favorable for all trading styles, particularly those who trade frequently. Therefore, the spreads can widen during certain periods, resulting in higher transaction costs overall.
Pros and cons of nano/cent accounts
A nano or cent account allows traders to open positions starting from 0.001 (known as a nano lot). With this account, traders can comfortably trade small balances like $10 on pretty much all currency pairs with minor margin restrictions.
- Cents accounts are preferable for traders with smaller capital. Newer traders who’ve never traded live before can also benefit while committing only a fraction of their disposable income.
- Although such accounts allow for tinier positions, this also means the gains will also be reduced.
- Only a handful of brokers offer nano accounts.
Pros and cons of fixed spread accounts
A fixed or zero spread account has lower spreads than a standard and nano account but with a commission per position. The commission is usually reasonable, though it applies for both opening and closing the trade.
- Such accounts are essential for high-frequency, high-volume, and algorithmic or expert advisors traders where having a lower spread is crucial to lowering trading costs and improving profitability.
- Only a handful of brokers provide fixed spread accounts.
- The leverage offered is usually lower than on a standard account.
- Fixed spread accounts typically require a higher minimum deposit.
Pros and cons of VIP accounts
VIP or premier accounts cater towards high net-worth individuals who trade large volumes. Brokers have a specific vetting procedure to assess a client’s trading experience, assets, and net income.
Unlike other accounts, VIPs receive some exclusive perks to enhance their trading experience, which can include some or all of the following:
- Much faster withdrawals
- Personal private account manager
- Tighter spreads or commissions
- Free Virtual Private Server
- Access to state-of-the-art trading tools
- Invitations to exclusive events
- Premier account holders have access to additional services not afforded to other clients, which is one of the main advantages.
- Due to the significantly larger capital, VIP traders can trade much larger position sizes.
- The minimum deposit for VIP accounts is very high, ranging anywhere from $20 000 to even $100 000 or sometimes more.
- VIP clients sometimes need to meet a particular minimum number of traded lots to keep their status.
Pros and cons of managed accounts
A managed account is where a designated ‘expert trader’ executes positions on behalf of an investor. Here, their trades are automatically copied onto the investor’s account.
The point of these is for investors to earn income without any manual involvement as they benefit from the skills of other experienced analysts who receive compensation in some form of commission for their efforts.
The two most common types of managed accounts in forex are PAMM (Percentage Allocation Management Module) and copy trading or social trading. Both function quite similarly with slight differences here and there.
- The biggest appeal with these accounts is the potential to earn from another trader’s work while only needing to pay small costs overall.
- It’s an excellent opportunity for new and experienced traders to learn ideas and strategies from others.
- Managed accounts are convenient for those who prefer a hands-off approach and don’t want to be actively involved in the markets.
- The most significant drawback with a managed account is making the best decision on the traders to invest with or copy. Investors are relying on the performance of another trader.
While sophisticated performance metrics that provide the likelihood of profitability are available, there are still risks of losing money. Thus, the biggest issue is trust.
Investors have to deal with slightly more fees than they would with self-directed trading.
- Managed accounts will have various capital requirements.
They say variety is the spice of life, hence the array of different trading accounts in forex. Despite this broad selection, the one underlying element that still exists is the financial risk, regardless of whether it’s a self-directed or managed account.
Ultimately, everything boils down to a trader’s skill, strategy, capital availability, preference, and experience.