Types of trading accounts
Forex trading is unique and special because it allows individual investors to compete with large hedge funds and banks, and all they need is to create the right trading account. There are three main types of trading accounts, Standard, Mini and Managed, each with their own advantages and disadvantages. The right account type for you depends on your risk tolerance, the size of your initial investment, and the amount of time you have available to trade on a daily basis. Finish reading this article, which will provide you with everything you need to know about the types of trading accounts.
Standard trading accounts
A standard trading account is one of the most popular types of trading accounts. This account gives the user access to a standard set of coins worth $100,000 each.
This does not mean that you have to put up $100,000 in capital in order to trade. Rather, margin and leverage rules state that only $1,000 is required in a margin account to trade one standard contract.
Positives
Service: Since a standard account requires sufficient upfront capital to trade full contracts, most brokers offer more services and better perks to retail investors with this type of account.
Earning Potential: You earn with every pip equal to $10, if your position moves by 100 pips in one day, the profit will be $1000. You will not get this profit with any other account type unless more than one standard lot is traded.
Capital Requirements: Most brokers require that standard accounts have a minimum initial balance of at least $2,000 and sometimes from $5,000 to $10,000.
Potential loss: Just as you stand a chance of winning $1,000 if your position moves, you could lose $1,000 on a move against you. This loss can be devastating for an inexperienced trader even with only the minimum in the account.
This type of account is recommended for experienced and well-funded traders.
Small trading accounts
Secondly in the Types of Trading Account article, a mini trading account is simply a trading account that allows traders to make transactions using small lots. On most brokerage accounts, the mini lot is worth $10,000, or one-tenth of the standard account. Most brokers that offer standard accounts will also offer mini accounts as a way to bring in new clients who are reluctant to trade full contracts due to the investment required.
Low Risk: By trading in increments of $10,000, inexperienced traders can trade without entering an account, and experienced traders can test new strategies without risking a large capital.
Low Capital Requirements: Most mini accounts can be opened with as little as $250 to $500 and may come with leverage of up to 400:1.
Flexibility: The key to successful trading is having a risk management plan and sticking to it. With small lots, this is much easier because since you can buy five or six small lots and reduce the risk of the large risks that come with one contract.
Negatives
Low Reward: With low risk comes low reward. Mini accounts trading with $10,000 can only generate $1 per transaction as opposed to the $10 you can earn in the standard account. This type of account is recommended for novice forex traders or those who are looking to adopt and try new strategies.
Managed trading account
The last types of trading accounts on this list are managed trading accounts, which are forex accounts where you cannot make your own buying and selling decisions. Account managers treat the account just as stockbrokers handle a managed stock account, where you set profit targets and manage risk, but the managers work to achieve them. There are two types of managed accounts:
Pooled Funds: Your money is put into a mutual fund with the money of other investors, and profits are shared. These accounts are rated according to their risk tolerance. If you are looking for higher returns, your money will be placed in a pooled account that has a higher risk/reward ratio, while if you are looking for a stable income the opposite will happen. Read the fund’s prospectus before investing.
Individual Accounts: The broker will deal with each account individually, making decisions for each investor based on their own preferences.
Positives
Professional Guidance: Having a professional forex broker handle an account is a great advantage.
Negatives
Price: Be aware that most managed accounts require a minimum investment of $2,000 for pooled accounts and $10,000 for individual accounts. Account managers will also keep a commission, called the account maintenance fee, which is charged monthly or annually.
Flexibility: You will have to rely on the account manager to make decisions about your investments. This type of account is recommended for high-capital investors who do not have enough time to follow the market.
Summary
Regardless of the types of trading accounts you choose, it is wise to test them out first. Most brokers offer demo accounts that give investors the chance to use a risk-free account to try and test it.
As a basic rule of thumb, never put your money into an account unless you are completely satisfied with the investment being made. With the different options available for trading account types, your success may depend greatly on choosing the right account type.
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