So what are the different types of forex trading account? First let’s take the standard account, which has the highest minimum investment. Most brokers ask for at least $10,000 and with some you need $50,000 to open an account. The standard lot size is 100,000 currency units. So with leverage of 100 times you would be putting up 1,000 currency units per lot.

It’s a lot of money (excuse the pun) and it comes as a relief to most traders to know that they can have a mini account with one tenth the position size, ie requiring 100 currency units to control a lot size of 10,000 units. The forex micro account is one tenth of the size of the mini, with a lot size of 1,000 units that you could control with just 10 currency units assuming 100 times leverage.

So why is the standard lot size so big? Years ago, before the rise of the internet, forex trading was done through dealing desks. Most trading was in the hands of the large financial institutions such as banks. It was possible for private individuals to get involved, but they had to phone a broker to give their instructions. The time cost of this meant that brokers would only consider taking on clients with a substantial amount to invest.

However, when brokers began transferring their services onto the internet, the costs were slashed almost at once. It was no longer necessary to have a staff of dealers answering a bank of telephones. Traders could control their own accounts from their own homes or offices, by logging on to the brokers’ website.

This means that it is now cost effective for brokers to offer much lower lot sizes and therefore much less of a minimum investment. Brokers leapt at this opportunity to attract a huge number of new clients, and the forex mini account was born, soon to be followed by the micro.

The minimum investment varies with the broker. Scaling down from the standard lot size you might expect the minimum for a mini forex account to be $1,000 to $5,000. In fact, many brokers will let you start with less, but it is better to have that kind of sum if you plan to trade mini lots. If you have less than $1,000 to invest in your trading, it would probably be better to start with a micro account.

There is something else to consider too. Taking the example that we gave earlier with 100 times leverage and assuming that the currency unit in question is the US dollar, if you open a forex mini account you will be dealing in lots of $10,000, requiring you to put up $100 for each trade. To many people that can seem like a lot of money. Remember, forex trading is very risky and your trades will not always be profitable. Some losses are inevitable. Are you comfortable with committing $100 to every trade?

If not, then a micro account might suit you better, at least at first, even if you have more than the minimum required to open a forex mini account.

A good video explains this in more detail if you click on this link, if you don’t have the time to watch the video, although we think you should, the following words will explain things to you too.

Leverage is fundamentally the ability to have a small amount of capital control a much larger asset. There are dangers to leverage, you can multiply your exposure at up to a ratio of 500:1. This sounds great but there are downsides to this 

Leverage In Forex Trading Explained

Leverage is a major component of forex trading and is one of the main reasons why so many people are drawn to forex trading in the first place. Leverage basically allows you to trade positions far in excess of your initial trading capital which means you can potentially make vast profits from forex trading.

However it should be pointed out that leverage works both ways. Whilst you can earn a lot of money very quickly by making winning trades, you can also lose money very quickly by using leverage. This is not uncommon either. There are lots of forex traders who have blown their account completely just through one single losing position, and all because they over-leveraged themselves.

Let me explain in more detail how leverage actually works when trading forex and why it is potentially so dangerous.

If you visit the website of any forex broker you will usually be presented with appealing offers such as ‘trade forex with 1:200 leverage’ or ‘open an account with us and enjoy 1:400 leverage’. These offers are designed to appeal to forex newbies who are drawn to brokers who offer high leverage rates because it means they can trade large positions whilst only risking a small amount of capital. In these examples 200 and 400 times their trading capital respectively. In other words $1000 can be used to trade a position worth $200,000 or $400,000.

Of course ultimately it’s the forex brokers themselves that benefit from such leverage because they know that the majority of forex traders will end up losing money, and by enabling their traders to overcommit themselves it means they make more profits in the long run. Plus even if they do not overcommit themselves they know that even a small move can result in large losses for highly leveraged traders.

So as a forex trader, you should be wary of signing up to brokers who offer high levels of leverage. It usually ends up benefiting them more than it benefits you. Your major concern should be finding a top quality reputable company that is reliable even during busy periods of the day, offers tight spreads, and is fully licensed and regulated by the relevant authorities. Leverage should not really be an issue at all.

Your aim is to make money so to do this you should use strict money management rules. This means employing a tight stop loss and only risking a very small percentage, ie 2 or 3%, of your trading capital on any one trade. This will mean that any losses you may incur are kept small in relation to your total bankroll which means you can stay in the game and live to fight another day.

The thing to remember is that you can still make substantial profits from forex trading without over-leveraging yourself. High leveraged positions should be reserved for gamblers and we all know that gamblers using end up losing money in the long run.

By: James Woolley

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