Foreign Exchange Account

There are two types of foreign exchange accounts; a mini foreign exchange account and a regular foreign exchange account. Trading with a mini foreign exchange account, offering all the facilities of a regular foreign exchange account, is an excellent way for small investors to learn about and take part in foreign exchange trading.

Normally, for most brokerages, a margin deposit of just $1,000 allows you to control a $100,000 position in the foreign exchange market. That's 100:1 leverage, or 1% (note: some brokers also offer leverages as high as 400:1). Said in a different way, a ‘regular full-sized foreign exchange account’, sometimes referred to as a 100k foreign exchange account, allows you to trade with lot sizes equal to $100,000. Each lot is worth $100,000 in currency. So it would only require $1,000 to trade one lot.

The great features of a foreign exchange account are what make this market the hottest market to trade in right now. The foreign exchange broker has given you a loan of $99,000 dollars secured only by your $1,000! This is a huge loan and, as you may know by now, this is what allows traders to make extraordinary incomes in this market. And, as you also are probably used to hearing, “leverage is a two-edged sword”, it is what can cause you to lose a lot of money if you trade without rules or stop-loss orders.

Unlike Futures (Commodity Trading), the market that most people associate with High leverage, you can never have a debit balance in your foreign exchange account when trading foreign currency.

So, despite the greater leverage associated with foreign exchange trading, it is still arguably less risky than futures trading. Futures markets are often prone to sudden and dramatic moves, against which you can't protect yourself, even by trading with protective stops. Your position may be liquidated at a loss, and you'll be liable for any resulting deficit in the account. But because of the foreign exchange market’s great liquidity and 24-hour continuous trading, dangerous trading gaps and limit moves are very improbable. Orders in the foreign exchange account are executed quickly, without slippage or partial fills, which is just great.

And as it was not enough, there are no margin-calls, for your protection, the foreign exchange broker's trading platform will automatically close out some or all of your open positions if your foreign exchange account equity, meaning the total floating value of the foreign exchange account, falls below the level required to hold the positions. Think of this as a final, automatic stop, always working on your behalf to prevent a debit balance.

A mini foreign exchange account, on the other hand, uses a different leverage calculation than a regular (100k) foreign exchange account. This means that instead of trading full-size currency lots (100,000 units), you'll trade in lots that are just 1/10 the size (10,000 currency units), which in turn greatly reduces the amount of money you risk in each trade you enter. Pips (one thousands of any currency quote) in a mini foreign exchange account are worth, on average, $1 instead of the $8 to $10 value they have in a regular foreign exchange account. The mini foreign exchange account sometimes offers up to a huge 200:1 leverage, this means that just a $50 margin deposit will allow you to trade lots worth roughly $10,000 , but the smaller lot sizes, with correspondingly smaller pip values, means that you'll be profiting less from a successful trade and also losing less if the trade goes bad. For example, while a 20-pip loss on a 100,000 USD/JPY position would be $200, the same loss on a 10,000 USD/JPY position in a mini foreign exchange account would amount to only $20.

Great news for the starting foreign exchange traders is that there is no maximum trade volume when you use a mini foreign exchange account. Although the standard trade size is 10,000 units, you are not limited to trading one lot. For instance, you can trade 10,000 units or even 200,000 units. Allowing that, as you become more seasoned and build up your confidence you can slowly increase the size of your positions to maximize profits. This ability of the foreign exchange account to customize the size of the trade will allow you to have a better risk management of your money.

In addition to the mini foreign exchange account and the regular full-sized foreign exchange account, there is another type of account known as a demo foreign exchange account. Many online foreign exchange brokers offer a demo account which is a simulation account that you can trade until you feel comfortable trading your own funds. Demo foreign exchange accounts behave just like real foreign exchange accounts, the only difference being that the money you are trading is not real and no actual trades are ever executed.

The purpose of using a demo foreign exchange account if you are new to foreign exchange trading is to get you comfortable making trades and to help you become familiar with the brokers trading platform. You can cut your proverbial teeth so to speak without risking any of your own funds. This makes a demo foreign exchange account good for a brand new trader who just wants to see how trading works. There are some drawbacks however to using this type of foreign exchange account to learn foreign exchange trading, as it follows.

The biggest downside to using a demo foreign exchange account is that you will likely only be able to trade standard size accounts with a demo account. If you intend to trade with a mini foreign exchange account, as many beginning foreign exchange traders do, a standard size demo account is going to behave differently than a mini foreign exchange account. Your margins are very different for a standard account versus a mini account. If you become accustomed to trading a standard size foreign exchange account, your trading methodologies will show it. This is because the larger margins offered on standard size foreign exchange accounts allow you to take greater profits from smaller movements in currency prices.

The other major downside to trading with a demo foreign exchange account for learning foreign currency trading is that as a trader, you need to carefully manage the emotional aspects of trading real money. Since a demo foreign exchange account utilises a simulated source of money, detachment is easy to come by. Once you start trading your actual funds, you might just find that your tolerance for risk is much more conservative.

Once you have read, studied, and completed any courses on foreign exchange trading that you may be taking, you are ready for probationary live trading. The single best way to trade the foreign exchange is to just Do it. Now, this does not mean to jump in and trade a full size foreign exchange account with real money as this would be an enormous risk for a new trader and not a very smart move indeed. What you can do is to find a broker that offers a mini foreign exchange account. Mini foreign exchange accounts usually start at $200 and typically give you 100:1 leverage. That said, as of this writing, there is one broker (Easy-Forex) that allows you to trade a live mini foreign exchange account for as little as $25.

Once you are comfortable trading your mini foreign exchange account, you can always have it converted to a regular foreign exchange account (with an additional deposit) if you choose. Overall, it can’t be stressed enough, the best way to learn foreign exchange trade is to have experience with live hands on trading.

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