Trading Accounts Types
Brokerage houses offer differ types of trading accounts for the retail Forex traders, based on the way the Forex broker is organized and the technology it is using. For the retail trader, choosing the right type of a trading account is very important. This is one of the things that make a difference between winning and losing. Making a profit in the foreign exchange markets is subject to various factors other than being right in the direction the market is going. As a matter of fact, one can correctly identify strong trends or fundamental events (like the Brexit vote in the United Kingdom, or Mr. Trump’s election in the United States) and still lose money. The reason for this is that market is not moving in a straight line, corrections and fake moves are the norms, and if the trading account is not chosen wisely, this can be costly. Before going into details about the types of a trading account that can be opened with a broker, it is important to mention that traders should find out as much information about the broker. Funny enough, the trading accounts offered to tell much about the Forex broker!
Choosing the Right Trading Account
To choose the right trading account, the trader must already know the broker to trade with. As a rule of thumb, any broker that is offering only a four-digit trading account should be disregarded.
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Avoiding Four-digit Trading Accounts
Brokers are split into different categories, as explained here on some of our previous articles dedicated to the brokerage industry. Some of them are market makers or dealing desks, some of them are non-dealing desks, ECN (Electronic Communication Network) or STP (Straight Through Processing), or a combination between the two. Avoid a Forex broker that is offering only four-digit accounts! This means that the quotes on the main currency pairs, like the EURUSD, GBPUSD, USDCAD or AUDUSD are only having four digits after the comma. For example, EURUSD will be offered at a bid/ask ratio of 1.0665/1.0666, or the USDCAD at a big/ask ratio of 1.3256/1.3259. This tells much about the way the brokerage house is organized. To be more exact, such a broker is a market maker, meaning it will “artificially” create a market that mirrors the real one. Not that this is a wrong thing to do in the first place, but these brokers are trading against the direction of their client’s trades. Even this is not something outrageous, as there are many market maker brokers that offer fair trading conditions. Only that the brokers with four-digit accounts will try to pull every trick possible to make traders fail. Because, remember, if traders fail, the broker makes more money from profiting from its own trading. Such tricks are requotes that are being received when traders want to open a trade at the market. In the end, the broker will allow traders to enter, but at a much higher or lower level, and by the time an entry is possible, the market already changed. As a conclusion, avoid four-digit trading accounts!
Commissions of Spreads? Or both?
Furthermore, trading accounts are divided based on the type of the fee they have. Such fees can be spreads, (the difference between ask and bid prices), commissions, or both. As a rule of thumb, the smaller the spreads are, the better the trading account, as normally such a trading account it is subject to better execution and real-time market access. ECN accounts are the ones that offer little or no spreads for the main currency pair, but the broker compensates this with a higher commissions table for different currency pairs. Moreover, you should know from the start that there are few brokers that do offer ECN accounts. Even if they claim that such an account is offered, the account is a mix between ECN and STP technologies, and the Forex broker may even have a part of it that is dedicated to market making. After all, Forex brokerage houses are not charities and a profit should be made. It is only normal, as brokers are businesses like any other. The only thing is that trading conditions should be fair. If this is happening, everyone is happy! Forex brokers act as intermediaries and make profits from the volume traded by its clients and other fees, while traders enjoy a fair trading environment.
Trading Accounts Based on Trading Styles
The trading style is an important factor when deciding the type of the trading account to open with any given broker. Swing traders and investors want to avoid any unnecessary costs that might incur to their trading account. Forex brokers know this and are offering (some of them, at least), trading accounts that are swap free. As a short description, swaps represent a rate differential between the two currencies that make a currency pair and they can be positive or negative. If this difference is a positive one, no one is hurt, as at the end of a trading day a small positive amount is going to be credited to the trading account. The problem comes from the fact that most currency pairs are offering a negative swap if positions are kept open more than a trading day and the rollover of a position takes place. You can imagine that for a trade that can take a few weeks or more, this is an additional cost on top of the regular commissions and spreads paid. To avoid that, swap free accounts are offered. As a rule of thumb, brokers are having a minimum deposit requirement for a swap free account, and this minimum deposit is quite high. However, traders that are interested in avoiding swaps are having a bigger time horizon for their trades, and therefore a bigger risk appetite, meaning they will agree in depositing more. Swap-free accounts are extremely popular in Arabic countries because they obey the sharia law. This way, brokers found a solution to integrate trading in this region too. All in all, consider the type of the trading accounts offered by Forex brokers to tell much about how the business is organized and how brokers are earning their profits if any. As for the retail traders, it is important to know how to choose the right trading account for your trading style. If the broker is not offering a trading account suitable to your trading style, look for other brokers, as there are plenty of them. The Forex brokerage industry is so competitive that it is virtually impossible not to find the right broker for any requirement a trader might have.
Recommended Further Readings
- Trading on a Demo Account
– Explaining why trading on a demo account before going on a live one is mandatory for any serious trader.
- Types of Forex Charts
– How many types of Forex charts exist, how to interpret them, advantages and disadvantages of each type, etc.
- Basics of Technical Analysis
– What is technical analysis, why it is important and why traders are using it. Advantages over fundamental analysis are highlighted as well.
- Financial Products to Trade
– Different categories of financial products that a Forex Broker is offering for the retail clients, starting with the classical currency pairs, and continuing with commodities, CFD’s, indexes, etc.
- Forex Trading Sessions and Their Importance
– Explaining the differences between the three Forex trading sessions, what are their importance, ranking, etc.
- Forex Brokers Types – ECN or STP?
– What is ECN, STP, how d- brokers deal with client’s orders, advantages, and disadvantages of the tw- types.
Other Educational Materials
- “Brokerage commissions and institutional trading patterns.” Goldstein, Michael A., Paul Irvine, Eugene Kandel, and Zvi Wiener. Review of Financial Studies (2009): hhp083.
- “Investor competence, trading frequency, and home bias.” Graham, John R., Campbell R. Harvey, and Hai Huang. No. w11426. National Bureau of Economic Research, 2005.