The foreign exchange market, otherwise known as the forex or currency market, is about as old as the emergence of national currencies. It's grown into the largest market on the planet, but remarkably, it hasn't been very long since the general public has had easy access to trading in this area.
Since the beginning of the internet era in the 1990s, retail forex brokerages have emerged that have allowed individual traders—nearly anyone with internet access and a small amount of initial capital—to begin trading currencies. Opening an account for forex trading has become similar to the procedure for opening a bank account or other type of brokerage account. But before starting to trade on the forex exchange market, it's useful to consider some information that may help assure you that trading is a secure, positive and successful experience.
Find The Right Broker
To trade currencies in the forex market, you will need to find a broker. Retail currency trading has evolved as a decentralised and lightly regulated activity in an over-the-counter market. Thus, it's recommended that prospective currency traders carefully research the reputation of brokers before opening a forex trading account.
You can do this by checking with local national regulatory agencies to verify whether the broker has any history of unfair or irregular practices. Even though all brokers technically provide access to the forex markets, they're not all the same. Before making the financial commitment to fund your account, it's imperative that the broker is regulated, licensed and in good legal standing.
You may also want to research the services offered by a broker before opening an account. Some may be more basic, plain-vanilla brokerages; others may offer more sophisticated trading platforms with analytical resources that can help you make better-informed trading decisions. Remember, it's always best to work with a broker that is committed to delivering the most value-added products and services for your money.
Traders will also want to compare commissions or other fees charged by brokers for their services. Quite often, forex brokerages will charge for trades through a bid-ask spread, which is a small percentage difference in the current buying and selling prices of a currency. However, some brokerages may have other types of commissions or fees for their services. These additional costs can be important to consider when determining the overall profitability of trading.
What Information Do You Need To Open An Account?
Advancing technology has made opening a forex trading account a relatively straightforward process. Applications are filled out via secure online application and processed in a short period of time. In some instances, a retail trading account may be instantly approved or denied.
If you want to open an account, then there are few pieces of required information. It mostly falls into the realm of personal data, which includes your country of origin, name, contact info and tax ID number. For instance, U.K. citizens may have to disclose a National Insurance Number (NIN) to open a forex account. Employment status or name of employer.
Due to the fact that forex trading is conducted on margin, risk of loss is assumed by both the trader and broker. To address this risk, forex brokers typically ask about your financial situation to make sure that you have enough money to cover any unexpected losses. Lastly, you will be asked if you are a financial professional and your degree of forex trading experience.
Procedure For Opening An Account
Opening a forex trading account is not complicated, but traders will need a few things to get started.
As stated earlier, you will usually have to provide information on an application regarding your level of trading experience and knowledge, along with your trading intentions. Additionally, you will also need to provide identification and fund your account.
The exact steps involved in opening an account may vary from brokerage to brokerage, but the procedure typically involves the following:
- Enter the broker's website and review the account types of accounts available. These can include small-scale accounts with low minimum balances designed for beginning traders; or accounts with sophisticated features designed for active traders.
- Complete an application form.
- Upon completing the application, you will be registered with a username and password that will give you access to your account.
- Log in to the brokerage's client portal.
- Arrange for the transfer of funds from your bank to deposit funds into your account. This may be through check, credit or debit card, or electronic transfer from your bank account. Note: Using a credit card for this purpose can be subject to interest charges.
- Once your account is funded, you are now ready to start forex trading. At this point, you will want to review any recommendations or special details that your broker provides regarding use of their trading platform before actually making your first trade. Some brokerages may offer a demo account to allow traders to practice before actually putting money into trading.
Types Of Forex Trading Accounts?
When it comes to forex trading, there are several types of accounts. Among the most common are retail, professional and institutional. At FXCM, clients are offered their choice of three trading account types: the standard account, Active Trader and professional. Each furnishes the trader with a unique suite of products and services.
- For most retail traders, FXCM's standard account is a fantastic way to start trading forex. With the standard account, traders enjoy access to the top currency pairs and CFD products. In addition, trade is conducted courtesy of our improved execution system with no order restrictions.
- The Active Trader account caters to those individuals that execute higher volumes of trades. A few of the key benefits are elite pricing, API trading and enhanced support.
- FXCM also offers a trading account designed specifically for professional traders who satisfy a specific criteria.
To Use Margin Or Not
After opening a forex account, traders will have to decide whether to use margin or not. This is an important consideration as implementing margin vastly increases risk. Margin can be considered a loan of funds from the brokerage to the trader so that the trader can "leverage," or effectively multiply, the amount of capital they have available to make a trade. Margin requirements are determined by regulatory bodies such as the U.S. National Futures Association (NFA) and your broker.
Depending on the country they are operating from, traders may be allowed access to margin in a ratio to their initial risk capital up to anywhere from 2:1 to 400:1. The amount of margin they want to use will determine how much capital they will need to deposit in their account as a form of collateral for their trading activity. The use of margin can increase potential profits, but it can also multiply risks, because traders will be responsible for covering any and all losses incurred in trading activity even those beyond their initial investment.
Opening a forex trading account is similar to opening other types of financial accounts. However, traders will want to carefully consider the reputation, services and costs of the available brokerages before making a commitment to depositing risk capital and beginning trading with a particular firm.
Leverage: Leverage is a double-edged sword and can dramatically amplify your profits. It can also just as dramatically amplify your losses. Trading foreign exchange/CFDs with any level of leverage may not be suitable for all investors.
This article was last updated on 14th May 2021.