Setting Up An FX Trading Account

Two hands trading currency

Forex brokerages and online platforms offer various account types, some aimed at casual retail traders and others at professional hedge fund managers and forex investors.

Any forex trader will need an account to access the FX markets and buy, sell or exchange currency. Although forex is decentralised, and there isn’t one global body that regulates or oversees the market, there is also no open access without a trading account.

The available currency pairs, commissions, spreads and leverage will all depend on the type of forex trading account you have. However, it is difficult to get it wrong because the brokerage will assign an account depending on your capital deposit and trading frequency.

Main Types Of Forex Trading Accounts

The three primary forex trading accounts are standard, managed and mini. Each has pros and cons and variations on analysis tools and trading mechanisms.

Your forex trading account will depend on the following:

  • Your skill level, and whether you are a forex novice or an accomplished trader.
  • Risk acceptance levels and the exposure you are willing to accept.
  • Trading styles and the time you expect to spend trading or monitoring market movements.
  • Capital investment values and the number of trades you make per day.

It is necessary to have different account types because forex is the largest, most liquid global market. An individual trader can compete with a banking institution or financial services provider, although not necessarily on the same playing field.

Standard forex trading accounts

Standard accounts allow you to use leverage, or borrowing from your broker, up to a ratio of 100:1. If you deposit a margin of £1,000 against a position, you can borrow up to £100,000 from your broker to maximise profits or increase losses.

The Financial Conduct Authority limits maximum leverage for forex brokers registered and regulated in the UK. Brokers can provide leverage of up to 30:1 for retail traders and 500:1 for institutional or professional traders, regardless of the account type.

Forex trading uses standardised lots as blocks of currency for each trade. So, for example, a standard trading account will deal in 100,000 units of each currency.

Standard forex accounts are the most common but may be inaccessible to retail traders who do not have the capital available to trade in complete lots of 100,000 currency units.

However, most forex brokers will offer a broader range of services and additional features such as technical analysis indicators and charting, which helps to identify a changing pattern or define when the right moment is to enter or exit a trade.

Potential gains in forex are calculated in pips, where one pip is the fourth digit after the decimal point in the quoted price. Therefore, with a standard forex account, your profits would equate to £1,000 if one pip is worth £10 and your position moves by 100 pips in a trading period.

This gain level is unavailable through other forex trading accounts unless the position involves more than one standard lot.

The downsides are that you may need an initial deposit of at least £2,000 and potentially £5,000 or £10,000 to open a standard forex trading account, depending on the broker and their minimum deposit thresholds.

Just as the possible profits are higher through standard forex accounts trading in full lots, the potential to make a significant loss also increases. That can mean that if you have the minimum balance in your account and lose by 100 pips, you will have a debt of £1,000 to repay.

Standard forex accounts are recommended for traders with sufficient forex experience and the available capital to accept the associated risk.

It’s also possible to trade Cryptocurrencies too; read our section to learn everything about Crypto.

Mini forex trading accounts

A mini account is better suited for traders with a low-risk acceptance threshold or wishing to trade smaller mini lots of 10,000 currency units.

New traders may opt for a mini account because they have a lower entry threshold, and the potential losses are limited to the number of lots purchased or sold.

Traders with a mini account can also use a mini lot. Most forex brokers will offer this option alongside standard accounts since they are a common preference for newer traders looking for a lower-risk account option – potentially upgrading to a standard account once they gain experience.

Mini forex accounts have a considerably lower risk because every trade is made in increments of 10,000, which allows a trader to test a trading strategy without as high a capital risk if the trade fails.

Brokers tend to require an initial deposit of between £250 and £500 to open a mini forex account and can offer leverage up to 400:1 depending on the regulatory caps in some jurisdictions.

Traders using mini lots usually find it easier to conform to a trading strategy because one standard lot is bulkier and less agile. However, taking out several mini lots across different positions or currency pairs makes it simpler to minimise risk through diversification.

There are pitfalls in that mini-trading accounts significantly reduce potential profits alongside the lower risk. For example, the maximum gain on a 10,000-unit lot equates to £1 per £10,000 lot rather than £10 through a standard trading account.

Micro accounts are another potential option, although unavailable through some forex brokers. A micro account allows traders to enter or exit positions with 1,000 unit micro lots, with pip movements worth up to £0.10 per point.

Beginner traders with a small capital deposit normally use these accounts, with initial deposit thresholds usually around £25.

Managed forex trading accounts

Managed accounts carry higher fees and act as the equivalent of an actively managed investment portfolio where your forex manager will decide on your behalf and according to your specifications.

The charges are higher than for other forex trading accounts, but ensure you benefit from specialist advice.

Any capital you deposit in a managed forex trading account belongs to you, although you typically hand over responsibility for controlling the account and making decisions to your account manager. They act according to your specified objectives regarding risk acceptance and target profit.

Managed forex accounts can be either pooled funds or private accounts.

  • Pooled funds are mutual funds where several investors contribute capital, and profits are distributed equally. Investors can buy into a pooled fund based on their risk expectations by reviewing the fund prospectus, such as a pooled account with a higher risk vs reward ratio.
  • Private or individual accounts are precisely that – the broker works on behalf of the owner to make decisions and choose when to enter or exit trades.

The apparent advantage of a managed fund is that a professional forex broker handles transactions.

However, you will usually need at least £2,000 to buy into a pooled account and £10,000 as a minimum for an individually managed forex account. The broker will charge monthly or annual commissions for their services, with other transactional costs borne by the account owner.

Another potential downside is relying on the account manager to make the right decision. If they act according to your trading strategy, there may be little comeback if they return a loss.

Managed accounts are best suited to those who wish to trade forex or have a proven trading strategy but do not have the time to monitor markets and want to defer to a broker.

Setting Up An FX Trading Account FAQ

Can you set up a forex account free of charge?

Several online brokerages offer new users the choice of setting up an account without any minimum deposit or with a low down payment of around £10.

To make a trade, you would need to contribute further funds or can keep your account live to use the demo or synthetic trading features without depositing anything further.

What is the best type of forex account for a beginner?

The best accounts for novice forex traders have the lowest risk and entry barriers in account opening deposits and minimum trade lots.

Mini forex accounts allow traders to buy and sell 10,000 units, although the potential profit is only £1 for each pip of movement.

Is there a minimum deposit to open a forex account?

It depends on the type of forex trading account you wish to open and the policies of your selected broker. The average minimum deposit required is £100, although some brokers have no initial account balance requirement.

What can you use a forex trading account for?

Forex trading accounts are normally managed via online brokerage platforms and are used to buy, sell and exchange currencies through the forex markets, although no actual cash changes hands.

Is it necessary to use a broker to trade forex?

All forex traders will need to register with a broker to open a position because retail forex trading is always managed through a brokerage service, whether a specialist forex broker or a general investment broker offering access to other markets.

Below is a list of some related articles, guides and insights that you may find of interest.

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