For those dipping their toes into investing, forex trading sounds like an exciting new financial opportunity. As one of the largest and most liquid financial markets to date, forex trading can be potentially rewarding, if the cards are played right. Moreover, forex trading differs from stock trading because individual investors can directly compete with financial institutions and large hedge funds, so long as the right account is set up. Since the advent of the internet era in the 1990s, retail forex brokerages have allowed individual traders – basically anyone with an internet connection, to start trading. As such, opening a forex account nowadays is much like opening a bank account. This article will take a look at tips to open a forex trading account, and what to consider.
What is forex trading?
Simply put, the term ‘forex’ (Fx) is a portmanteau of the phrase foreign exchange. Essentially, it refers to the buying and selling of a currency in exchange for another. This type of trading is used the most often in the world, as businesses, people and countries all participate in it, as a result of the world becoming more interconnected. Internal currencies must be exchanged for foreign business and trade to work. Most people will have participated in the global foreign exchange market for once in their lives – most often by traveling overseas. If you are from the US and travel to France, you need to exchange your dollars for the local currency, euros, at the current exchange rate.
This concept is essentially the bedrock of forex trading. In the market, currencies are always traded in pairs – the first currency is the based currency, and the second is the quote currency. This signifies how much of the quote currency is needed to buy one unit of the base currency. For example, a quote of EUR/USD = 1.2500 means that for every 1 euro, you can exchange up to 1.25 US dollars. Other major currency pairs often traded in the market include USD/JPY, GBP/USD, USD/CAD, and more.
A unique aspect of forex trading is that there is no central marketplace, unlike stock trading. Rather, forex trading is conducted over the counter (OTC) via computer networks around the world, instead of through a centralized exchange. The market is also open 24 hours a day, for five and a half days a week at almost every timezone. When a particular region’s trading day ends, traders can immediately move on to another region to begin anew. This makes the forex market extremely active, but also extremely volatile. This is an important aspect that traders must remember if they want to do well in forex trading.
Choose a reliable broker
To get started with forex trading, traders will need to find a suitable broker. A forex broker is essentially a financial service provider through which a retail trader can buy or sell a currency. As forex trading is done in an OTC market, it is recommended traders take the time needed to carefully research a possible broker before picking one and opening an account. Here are some tips to keep in mind:
- Check with national regulatory agencies: You can check with any local or national regulatory agencies to see whether a broker has a history or reputation of unfair practices. This is because even if all brokers technically offer a way to trade in the forex market, the quality of each broker is not necessarily the same. It is important that your broker – who will be handling financial transactions on your behalf – is trustworthy and knows what they are doing. For example, if you are looking to choose a forex broker in Norway, which is part of the European Economic Area, make sure they are registered and regulated by the Financial Supervisory Authority of Norway (Finanstilsynet) or any other European regulatory authority. The FSA is responsible for ensuring all financial institutions are complying with Norway’s laws and regulations.
- Research services offered: Another thing to keep in mind is that not all brokers will offer the same types of services. Some brokers might offer a more basic and simple package, while others may offer a more complicated forex trading platform with sophisticated analytical software to help improve trading decisions. Make sure to get the most value-added products and services, and that you understand how to use them properly. Beginners might also want to look for brokers that offer good and speedy customer service, so if any questions or problems arise, they can be immediately solved.
- Compare commissions or other fees: A retail trader also needs to look at the commissions and fees of a broker before selecting one. Most often, forex brokers make money through the bid-ask spread of a currency pair. This is the small percentage difference when it comes to the buying and selling price of a currency. However, some brokers might collect additional fees. Some may charge a monthly or annual fee to access a particular trading software or other unique trading products such as exotic options.
Typical requirements
Here are a few typical requirements a forex trader needs to provide to get started:
- Name, email, address, phone number
- Password for trading account
- Date of birth and country of citizenship
- Account currency type
- Employment status, tax ID
- Annual income, net worth, trading experience, trading objectives
Types of platforms to choose from:
After selecting a broker, there are a few types of trading accounts an investor can choose from. The one you pick will depend on how much you want to trade, how much risk you are willing to take, and what your investment size is. Here are a few of them below:
- Demo accounts: They are free training accounts most brokers provide when starting. This is a fantastic way for beginner traders to learn more about forex trading, as they can experiment with virtual currency in real-time market conditions. It also gives a trader practice in using the software and understanding its interface. A trader can use this account to practice strategies, and see how they fare. After enough practice, a trader can then move to an actual account and start trading with real money.
- Mini/micro accounts: A mini trading account is simply one that only allows traders to use mini lots. This lets first-time traders enter the market with smaller trading quantities, meaning their risk and potential losses is lower. Deposits can go as low as $20-$100. Most brokers that offer standard accounts will most likely offer mini-accounts as well. Despite being more flexible and low risk, a mini account comes with more restrictions, and only allows 10,000 base currency units. This means that potential rewards for traders are also low.
- Standard accounts: By far the most common forex trading account, it is often referred to with different names, such as ‘classic’, ‘intermediate’, or ‘premium’ accounts. Despite this, they are simply regular accounts offered by brokers. This means a trader has access to standard lots of currency worth $100,000 each. Standard accounts often provide better services and perks compared to their mini counterparts. On the flip side, most brokers require would-be holders to have a starting minimum balance of at least $20,000 and sometimes between $5,000-$10,000. There is also a larger potential for severe loss if the market moves against the trader.
- Managed accounts: Unlike the other two accounts, a managed account is where a trader puts their capital in but leaves the decision to buy and sell to a third party. This is usually the job of account managers, who handle the account similar to how a stockbroker handles a stock account. Investors simply need to set their objectives and goals, leaving the rest to the account managers. Managed accounts generally come in one of two types:
- Pooled Funds: Where money is placed in a mutual fund with other investors. This means all profits are equally shared.
- Individual accounts: Where a broker will handle the account on its own.
The benefits include getting more security and professional guidance, as your accounts are managed by an experienced forex broker. You can also diversify your account without having to watch the market. However, these accounts generally require a minimum $2,000 investment in pooled accounts and $10,000 for individual accounts. Account management fees are also calculated monthly or annually. A trader will also not get as much flexibility, as the manager is the one making all the decisions.