Trading Accounts Types
Brokerage houses offer differ types of trading accounts for retail Forex traders, based on the way the Forex broker is organised and the technology it is using. For the retail trader, choosing the right type of a trading account is very important, as 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 about the direction the market is moving in. As a matter of fact, one can correctly identify strong trends or fundamental events (such as 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 the market does not move in a straight line, as corrections and fake moves are the norm, and if the trading account is not chosen wisely, this can be costly. Before going into details about the types of trading account that can be opened with a broker, it is important to mention that traders should find out as much information as possible about the broker. Funnily enough, the trading accounts offered can 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 only offers 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); and some are a combination of the two. You should avoid a Forex broker that is offering only four-digit accounts, as this means that the quotes on the main currency pairs, such as the EUR/USD, GBP/USD, USD/CAD or AUD/USD, only have four digits after the comma. For example, EUR/USD will be offered at a bid/ask ratio of 1.0665/1.0666, or the USD/CAD at a bid/ask ratio of 1.3256/1.3259. This tells much about the way the brokerage house is organised. 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 clients’ trades. Even this is not something outrageous, as there are many market-maker brokers that offer fair trading conditions; it’s just 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. An example of such tricks is requotes that are received when traders want to open a trade on 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 will have already changed. So, in conclusion, avoid four-digit trading accounts!
Commissions or spreads? Or both?
Furthermore, trading accounts are divided based on the type of the fees they demand. 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 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 for 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 usually a mix of 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 they have to make a profit, which is only normal, as brokers are businesses like any other. The only thing is that trading conditions should be fair, and if this is the case, everyone is happy! Forex brokers act as intermediaries and make profits from the volume traded by their 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 they might incur on their trading account. Forex brokers know this and offer (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 offer a negative swap if positions are kept open for 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 have a minimum deposit requirement for a swap-free account, and this minimum deposit is quite high. However, traders who are interested in avoiding swaps have a bigger time horizon for their trades, and therefore a bigger risk appetite, meaning they will agree to depositing more. Swap-free accounts are extremely popular in Arabic countries because they obey the Sharia law. In 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, as it tells much about how the business is organised and how brokers are earning their profits, if any.
Just as it is for 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.