What are they and what should I choose?

The names used to describe the different types of forex broker accounts vary among the many companies, although most offer some set of basic options to their clients.

Since different account types may be designed to benefit certain types of traders, as well as the account size you will be trading with, it is important to choose the best account option for your specific needs and resources.

Most forex brokers allow the client to open a spot trading account, which is either a demo account or an active live account. To test a broker without depositing any funds, a trader can usually open a brokerage account with virtual money. This is called a demo account and allows the trader to evaluate the brokerage firm's services and their trading platform.

Moreover, a demo account allows a trader to test his trading strategy without any financial losses that might happen in a live trading account. In fact, the demo account has become one of the most popular features available to traders. Once a trader is comfortable using the brokerage they have evaluated on the demo account, they can then transfer funds to a live account to begin trading with real money.

Forex brokers usually offer different types of accounts, which fall into several main categories.

Two Main Types of Forex Accounts

You can easily divide the main types of forex broker account types into two main categories. The first category is a forex demo account, which uses virtual money, so the trader does not take on any monetary risk when trading. The second type is a live forex trading account, which is funded with real money and can result in real profits or losses for the trader.

  • A demo account allows a trader to test his trading plan for profitability, possible drawdown and other performance indicators. It also allows the trader to evaluate a brokerage firm offering to open an account without committing actual funds. Most brokers will allow you to open a demo account without any obligation, providing a minimum amount of personal information. These accounts often have a limit on the amount of virtual funding provided and also have a time limit after which the demo account expires and requires the trader to create a new demo account or switch to a live account.
  • A live forex trading account can typically be funded from $50 up to any limit set by the broker for client deposits. Once a live account is opened and funded with real money, the trader can initiate and liquidate trades. Depending on the selected account type and its capitalization, a trader can trade currency pairs with full lots, mini-lots or micro-lots, or use cent accounts.

Most prudent traders will first thoroughly test their chosen broker, its trading platform and service using a demo account before opening a live account.

What is different for real trading accounts?

Forex brokers typically offer various benefits and services that may or may not be beneficial to the trader. When a trader is considering using a particular broker, he should consider the services offered and then spend some time to determine whether any of the services offered may be useful now or in the future.

The following list outlines some of the differences between live forex trading accounts, both between brokers and between accounts offered by the same broker. Carefully review your broker's list of services for any existing account you may be considering opening.

  • The initial deposit amount is one of the key factors that forex brokers consider when opening a trading account. Most brokers offer VIP or special accounts when the initial deposit is quite significant. These accounts will offer the customer more services and features than a standard account, which usually requires a smaller initial deposit, or a micro account, which usually only requires a nominal amount to open.
  • Access to the dealing desk. Access to a dealing desk can be an advantage for traders seeking advice on direction, flow and other market advice from professional customer service dealers. The availability of this feature will depend on the type of broker and type of account you open, as higher tier accounts are more likely to offer this feature. If the broker is an ECN broker that allows you to trade directly with the interbank market using an electronic platform, then you will generally not have access to a dealing desk, although you may be able to contact market specialists for advice. On the other hand, if the broker is a market maker who takes the other side of your trades, they may well have a dealing desk with trading staff that you can talk to directly.
  • Trading platform. An easy to use and navigate trading platform is of utmost importance for traders looking to maximize their trading experience. Although most forex brokers typically provide MetaTrader 4 or 5, many forex brokers also offer their own trading platforms.
  • Analytics. In addition to the many technical indicators offered by the MetaTrader trading platform, many brokers offer signal generators and other forms of analytical trading tools that can be very useful in determining the timing of entry and liquidation of positions.
  • Access to API for automated trading. An API or application programming interface allows the software to automatically initiate and liquidate trades when certain market conditions are reached. These automated trading programs are also called “advisors” or robots when they run on the MetaTrader trading platform, but they can also be programmed to run on many other proprietary forex trading platforms using the broker's API. This type of software is usually either programmable and allows the user to configure and optimize various parameters.
  • News services. Many forex accounts include access to a business news service such as Reuters or Dow Jones Newswires, which may appear as a news scroll on the trading platform or elsewhere on the broker's website. Additionally, the MetaTrader trading platform includes its own market-related news feed.
  • Minimum transaction size. Most forex brokers have a minimum trade size, which is known as the lot size and is usually expressed in units of the base currency. For example, standard lots are typically 100,000 units of the base currency, mini lots are typically 10,000 units of the base currency, and micro lots are typically 1,000 units of the base currency. The minimum trade size will vary depending on the account type. That being said, accounts that require a higher initial deposit typically have a standard lot size, while accounts with a minimum initial deposit offer micro lots as a base denomination.

Types of Forex trading accounts

Most forex brokers now offer several basic account types, the features of which vary depending on the size of the initial deposit:

  • A micro account allows traders to open an account with a minimum initial deposit, such as $50 to $100. Additionally, the minimum trade size is usually one micro lot or 1000 units of the base currency. These accounts may be ideal for new traders.
  • Mini Account – A mini account requires a larger initial deposit and a minimum trade size of one mini lot or 10,000 units of the base currency.
  • Full score. These accounts are usually designed for more experienced traders and have a higher initial deposit. A full account usually has a standard minimum trade size of 100,000 units of the base currency, although some may allow traders to use mini lots as well.
  • VIP account – the best accounts for experienced traders with large volumes and the largest initial deposits. These accounts often provide access to additional analytics, a personal advisor and the tightest spreads.
  • Cent accounts allow you to trade even smaller amounts compared to micro accounts.
  • Swap-free accounts are accounts on which there is no swap.

Types of Forex accounts

Managed accounts typically involve some kind of external management activity separate from the trader or owner who finances them. The types of accounts that fall into this category often require a significant initial investment and will be convenient for those who do not want to deal with trading or making trading decisions.

Five common types of managed accounts that are sometimes offered by online brokers include:

  • Individual is a personal account that is managed by the staff or software of a forex broker. This type of account uses the client's capital, but trades are initiated and liquidated by the account manager. As a rule, the investor sets his goals and parameters for making transactions.
  • Pooled – With this type of account, money is placed in a mutual fund with funds from other investors, and the profits are then distributed among all participants. Accounts may offer different risk-to-reward ratios. Moreover, higher returns are usually observed for accounts with a higher risk-reward ratio.
  • Social trading account. In a social trading account, a trader can selectively follow other traders with good trading. Execution can be discretionary when a new trade from an experienced trader is notified, or can be automatic when an experienced trader's transaction is matched by currency pair and direction, but can also be scaled according to the wishes of the owner.
  • Automated – This account type provides access to an API that is available to automate trading operations. Automated accounts can be managed or can use the trader's own parameters to initiate and liquidate trades.

Choosing a suitable account for trading

Choosing the best account type to open will depend on a number of factors related to the trader's experience and how the trader wants to run their forex business.

If a trader wants to implement his trading plan and test it on a demo account, then it would be best to start with a demo account.

A trader who has sufficient experience coupled with a good initial deposit and knows exactly what he wants from a broker, trading platform and customer service features will likely choose to open a full-fledged forex trading account after trying out the broker's services for the first time on a demo account.

The trader must evaluate the features offered, the trading platform and the spreads. Additionally, the trader must evaluate the broker's model—whether it is an ECN broker, a market maker, or a dealing desk—and decide which model best suits his trading goals.

If a potential forex trader does not want to get involved in day-to-day market activity and would rather let others handle their funds instead, then a managed or automated account would be best for them.

How to open a trading account?

Ideally, you will want to open a trading account with a top forex broker. Many brokerage companies will offer you several account types to choose from. Depending on the level of your initial deposit, you will also have access to various bonuses, such as additional capital for trading.

After building confidence in the broker's platform, pricing and trading functions using a demo account, a trader can then open a live account, which usually involves going through the identification required by the broker.

Many seasoned traders will start by funding their account with a minimum amount of capital to see if the broker's actual performance matches that of the demo account, and to ensure there are no slippages or requotes. Testing the broker's withdrawal policy may also be worthwhile to ensure that funds are withdrawn according to the stated regulations.