Opening a forex account is easier than ever before, thanks to the growing range of banks and brokers offering them to clients, but still requires careful thought and a certain degree of planning. Which account type is best for you depends largely on your own trading requirements, investment style, home currency and planned account size.
Making a decision about what sort of account to open isn’t easy, and it is important to prepare properly by informing yourself about the different account types available. Understanding your own forex requirements is important to; are you looking to day-trade, make a large one-off FX transaction, or make smaller regular payments in a different currency? All of these needs will have slightly different solutions available to them, and there is no one-size-fits-all solution.
What types of accounts exist?
Many different forex accounts are available. One of the first decisions you will have to make is whether to use a bank or broker – normally banks are better suited to traders who plan on making smaller, infrequent transactions, as they offer great simplicity and easy conversion from your home currency, but tend to be less competitive on rates and not to offer the same level of charting software. Day traders usually use a brokerage, often operating on MetaTrader (4 or 5), in order to access detailed up to date charts for technical trading.
Let’s say you are looking to buy $1000 for a trip to the US, and have no additional foreign currency requirements. Clearly, your best choices here would be the bank where your current account is, or a dedicated travel money broker, perhaps making the transaction in cash for easy accessibility.
This is a very different type of transaction to requiring €75,000 for a commercial investment in machinery or property. In this case, small differences in rates can be extremely significant, so it is a must to find the most competitive price possible. In this instance, shopping round various banks and brokers to find the most competitive exchange rate is essential.
Finally, if you are looking to open a $10,000 forex trading account in order to trade actively, a totally different set of solutions is required. As with larger one-off transactions, rates are a top priority, as they will directly impact your profitability. What’s different is that active trading will also require rapid execution, proper charting software and the ability to trade a range of currency pairs. Some brokers allow you to open a forex account which combines competitive rates with charting capabilities.
Trading style and account type
Assuming you are opening your account for the purpose of trading forex, you will likely need an account with a major brokerage, probably one using an instance of the MetaTrader platform. Different trading styles have slightly different requirements: the best way to test out a particular brokers platform is to run a demo account for a few days or weeks and see which is best suited to your needs. During this time, pay close attention to all of the features, how simply you can trade, as well as of course the rates. Remember, demo accounts often come out with slightly different returns as they assume full and immediate execution with no slippage; it is safest to slightly revise downwards expected strategy returns when moving from a demo account to live trading.
Traders working on very short timescales, or using algorithmic strategies, need to be sure that these strategies are compatible with their brokerage platform. Fixed fees per trade, slow latencies and other issues might make a certain platform unsuitable for this type of trader.
Alternatively, traders who prefer to make fewer, high-conviction trades, perhaps using a mixture of technical and fundamental strategies, may prefer a system that offers them charts, economic calendars and fundamental indicators alongside good rates. In this case, the trader is likely slightly less sensitive to small increases in spreads, as their trades are higher-margin. Always balance the convenience a particular platform offers against the cost.
There are multiple factors to consider when opening a new forex account. Making the right decision involves understanding your own requirements as well as the offerings of various banks and brokers. For many FX transactions, a dedicated account may not even be necessary, but for regular traders the wide range offered by brokerages can make it an overwhelming decision.
What is important to focus on is the exact needs you have for the account, and cost. It is no use trading on a wonderful platform with many effective features if the spreads and commissions are so high that your profits are immediately destroyed. Likewise, for many trading styles, a brokerage could be very effective on rates but next to useless for the actual work of trading if their execution times are slow, they do not offer proper technical support, or you cannot use charts. Some of those problems can be solved with third-party software, but this will often add an additional layer of cost that needs to be factored into your overall profitability.
To sum up
Once you have a found a few likely candidates for a good brokerage platform, test out their demo features. Most brokerages will offer you the opportunity to dummy-trade on a demo account for free, giving you an idea of how the platform works and what features are available. If you find one platform simpler to use than the others, and find your trading improves, check their fees (you should have some idea on spreads from the demo platform), and consider opening a live account.
Always remember you can change platforms. If you find you aren’t getting on well with a particular platform, and the issues aren’t more general, then you can always close your account or transfer your trading to another provider. Being proactive when screening and selecting brokerages will help you make the right decision.
Lastly, it is of the utmost importance to check your brokerage is properly regulated in the jurisdiction where you operate. Look for certification that they are registered with your local financial regulator, and do not trade with an unlicensed brokerage!