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The forex market has become more vibrant than ever before. Recording the increasing number of traders in the currency market, forex brokers promptly provide a wide selection of account types that accompany assorted benefits. Of which, micro and standard forex accounts are more prevalent. Understanding their differences would help you pick the most suitable one for your trading goals and experience.
Opening a Trading Account
The forex market now is diversely segmented with the recent participation of retail traders. Instead of owning physical currencies, they are allowed to enter forex transactions by betting on price movements of currency pairs to make money. To do so, speculative traders need to register for a trading account with any regulated broker beforehand. The account gives them easy access to the over-the-counter (OTC) forex market.
Regardless of forex brokers, the account registration process is very fast and straightforward. The common steps to obtain the official account include:
Signing up for an account, you must offer personal information such as your full name, nationality, phone number, email address, password and the currency on which you prefer trading assets.
After the successful registration, you may be required to provide additional details (e.g. residential address and employment information) to complete your profile.
Your account needs to be validated. Some brokers do not require clients to take this important step until they wish to draw profits out, whilst others encourage account holders to have a verified account ahead of the deposit.
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In this phase, you should submit several personal documents so that the forex brokerage can process the verification of your account. Such credentials include a photo of your ID card (passport or national identity card) and a photo of residential address proof (utility bill or bank statement). Besides, if you use credit/debit cards to make a deposit or withdrawal, you should provide a photo of those cards on both sides.
The merely registered account allows you to open multiple real or demo accounts. Paper trading enables you to test out trading strategies or get to know your broker without monetary risks. In case you seek exposure to live market conditions, you need to finance your trading account first by credit/debit cards, wire transfers and digital wallets. Deposit amounts vary as per brokers.
Normally, the deposit request is instantly processed regardless of payout solutions. No deposit fee is often involved. However, your depositary bank or provider may take some time to handle this requisite and impose some transaction charges.
Right after your account balance is credited, you may start trading based on your preset trade setups.
As trading forex and CFDs on an off-exchange system can bring high levels of risk, setting up the possible position size, choosing a fixed leverage ratio and more are important matters to take into consideration. With that said, many forex brokers will grant assorted trading accounts to optimize the client’s currency speculation on the market. Some popular account types can count micro and standard forex accounts, which would be the main focus of this article.
What’s the Difference Between Micro and Standard Forex Accounts?
Historically, brokerage companies denominated their allotted accounts in accordance with the minimum lot sizes their clients could trade. Accordingly, micro and standard forex accounts were introduced and have been ubiquitous until now. Regardless of account types, retail investors receive similar perks such as leverage ratios, instrument numbers or the spreads on major currency pairs. Having said that, there are still notable distinctions to assist clients in choosing the best one.
Smallest Trading Volume
By definition, a micro account is designated for those who wish to enter the real-time forex market, yet fear losing significant funds. It affords retail clients the smallest contract of a micro lot which is equivalent to 1,000 units of the base currency (commonly known as 0.01 lots).
Meanwhile, a standard account aims at more adventurous traders who prefer gaining access to at least a standard lot. This position size equates to 100,000 units of the base currency, denoting 1 lot on trading platforms.
To illustrate, when speculators would like to go long on a micro lot of EUR/USD at 1.20744, it means they must top up 1,207.44 USD to purchase 1,000 EUR. By comparison, standard account owners have to pay 120,744 USD if they want to buy at least 100,000 EUR.
Pip is an important concept in forex trading. This is simply because this term is frequently used to calculate price changes of investment products in trading account currency. Moving forward, traders can measure gains or losses after currency transactions.
The pip value inevitably varies as per position sizes. Assuming your trading account is funded in the US dollar. You plan to open a micro account and then trade American quotes such as EUR/USD. The one-pip movement will be fixed at US$0.1 provided you buy the smallest contract. A 20-pip profit translates to US$2 (= US$0.1 x 20 pips), whereas a 10-pip loss is equal to US$1 (= US$0.1 x 10 pips). Despite the insignificant profit, the possibly accompanied loss can be too petty to exhaust your account balance.
In the case of a standard account, the profit and loss will be augmented as the pip is now worth US$10. Applying the given formula for the same settings, the P&L statement will report the earning of US$200 and the loss of US$100 respectively. Two scenarios deduce that standard account holders either risk more money or generate higher profits than their micro counterparts.
Nonetheless, such information does not suffice to prove that the former is facing the higher possibility of burning reserves. In reality, you do not need the initial capital of US$1,000 or US$100,000 to open micro or standard lots. The introduction of leverage facilitates low-investing traders to enter the market. Moving forward, they may deposit US$10 and amplify this investment amount dozens or thousands of times. When the market moves unprofitably, the too-low trading capital cannot cover their consecutive losing trades, even if they open micro-lots.
To minimize the described risk, brokers implement different capital requirements for two account types. Normally, forex brokerages require at least US$10 for micro-accounts. The figure for standard accounts often starts from $250.
Types of Holders
From those given accounts, it seems that a micro account can be more suitable for beginners because it supports them to get familiar with real-time market volatility and learn the fundamentals of the market (e.g. price fluctuations or risk management). A negative outcome in the micro account is milder than that in the standard and higher ones, making it an ideal choice for those who still lack risk management. Accordingly, novices may trade on a smaller scale as long as they open a micro lot.
A standard account seems more associated with higher stakes. Therefore, this account type is highly suggested for more well-funded, seasoned forex traders.
Undoubtedly, standard account holders have an advantage over micro ones. As per forex brokers, the former often has the privilege of bonus programs, trading signals, webinars with personal analysts and more benefits.
Despite what is described, some forex brokers are now pretty flexible in providing clients with micro and standard accounts. This means the latter is not limited to the smallest trading volume of one standard lot, but potentially expands to a micro lot. At those brokers, they maintain distinct deposits and extra advantages for both types of accounts. Therefore, before working with any legitimate brokers, you should find out about what they offer for varied account types.
Other Common Types of Accounts
Apart from micro and standard forex accounts, forex speculators are offered a wide range of account types as follows:
Mini Forex Accounts
A mini account empowers traders to open positions with mini lots. One mini lot represents 0.1 lots or 10,000 units of the base currency. Taking the given example back, one pip for a mini lot is valued at US$1. Therefore, when the position moves as opposed to what you expected, a 10-pip loss will cost US$10. Accordingly, the minimum capital requirement of mini accounts is lower than that of standard ones but higher than that of micro-accounts.
Short for Electronic Communication Network and Straight Through Processing, an ECN/STP account excludes the participation of forex brokers as the counterparty to your transactions. This means it offers you direct access to other liquidity providers and consequently gives quotes that are closer to real-time market prices.
Unlike other given trading accounts in which you will make a buying and selling decision yourself, managed trading accounts are administered by account managers. On behalf of your accounts, those professional traders will handle currency transactions to meet your targets and receive commissions or some percentage of profits as wages. If you own high capital but have no time to do forex trading, this type of account may be more appropriate for you. Though, the accompanied capital requirement may be rather high, roughly US$1,000 for individual accounts.
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