How to Open Forex Account

Forex trading is a really exciting and preferred business by millions of people all around the world. It could be very profitable, indeed, but the question here is, can anyone open a Forex trading account and start buying and selling right away?

Well, yes, the foreign exchange market can be accessed by anyone and opening a trading account is quite easy and straightforward. However, there are a couple of important things prospective traders need to consider before entering the world of Forex.

First of all, the foreign exchange market can be accessed by individuals but only through a professional brokerage firm. Finding a reputable broker that will suit your needs may be challenging for beginners since there are thousands of different brokers out there. With good research, however, the task is relatively easy.

Once traders have chosen a suitable online broker that offers Forex trading, they need to sign up in a process that is similar to opening a standard bank account.

Registering a Forex Trading Account

Trading currency pairs in a profitable way requires knowledge and skill but the first step is setting up an account with an online Forex broker. There are different types of brokers but it is always best to select a firm that is licensed and regulated. However, reputable, licensed brokers would not accept just anyone as a client – they need to verify their clients’ identities and make sure that the trader can afford to trade on the Forex market since this type of activity involves risk.

Personal Information

To register an account with the broker of their choosing, traders will need to provide a lot of personal information. This typically includes name, date of birth, address, country of citizenship or residence, email, and phone number.

While this sounds pretty standard for any kind of online registration, Forex brokers would also need your employment status, TAX ID, Taxpayer Identification Number (TIN), or social security number. Traders also need to specify their preferred account currency type – usually, their national currency. Then, they will be prompted to set a password for their trading account – stronger passwords (consisting of at least 6 characters, upper and lower case letters, numbers, and symbols) are recommended.

Financial Information

In most cases, individuals who wish to open a trading account would need to answer a few financial questions, as well. The broker would need to know traders’ net worth and annual income and may even give out a brief questionnaire regarding the traders’ financial knowledge and experience, as well as their trading objectives on the broker’s website.

This may seem a bit too demanding but often, Forex brokers need all this information to comply with the local financial regulations. It should be noted, though, that not all countries supervise the Forex brokers the same way – laws are strict across Europe, the UK, and the United States, for instance. Offshore brokers, on the other hand, rarely face such tough regulations, which is why they open client accounts more easily. Sadly, such brokerages also rarely offer adequate security and protection of client funds.

Verification Process and Duration

Once traders fill in the registration form, the information is processed by the broker. Usually, Forex brokers ask for some additional documentation to be sent. Some traders may find this frustrating but it is actually an important part of the verification process. Clients would typically be required to provide a copy of their passport, government-issued ID or driver’s license. As proof of their address, they would also need to upload a recent utility statement.

All this may slow down the registration and verification process. In most cases, the trading account will be verified and operational within one or two business days. This may seem too much but it is not – after all, having a Forex trading account should be taken seriously by traders. Trading on the Forex market involves actual financial risk – a fact we are constantly reminded of with the risk warnings brokers publish on their websites.

Types of Accounts

Another important step is choosing the type of trading account that would suit traders’ needs based on their level of understanding of the Forex market, their starting capital, and their interests. In stocks trading, traders may usually open either a cash or a margin account but when it comes to Forex, all client accounts offer the so-called “trading on margin” – using borrowed funds to be able to control larger positions than you normally would with your limited balance.

There are, however, various other types of Forex trading accounts. Usually, they differ from each other based on the minimum trading size requirements but let us start from the most fundamental account types, i.e. the demo and live accounts.

Demo vs. Live Trading Accounts

They are offered by virtually every Forex broker out they differ in one main aspect – the demo account is available for simulated trading with virtual funds, while the live account needs to be funded with real money and allows actual trading on the foreign exchange market. The concept of the live trading account is pretty straightforward and self-explanatory, which is why we should focus on demo accounts.

Many traders decide to skip this first step of their trading experience, ignoring the educational value of having a no-risk trading account. Opening a demo account usually requires only basic personal information and takes no more than a few minutes. Once set up, this account allows traders to explore the trading platform they use, to open positions with virtual money, and to test strategies and observe their efficacy under real market conditions.

Of course, since no actual money is invested, there is no risk to one’s finances. This is a wonderful opportunity for beginners to enter currency markets and learn the basics of successful trading.

Standard, Mini, and Micro Accounts

As mentioned above, most Forex brokers offer their clients at least two types of trading accounts based on the minimum and maximum trading size. In other words, there are small-sized or mini accounts for traders with a smaller initial investment and standard accounts for everyone else. Choosing a specific account type should be relative not only to the trader’s amount of capital but also to the individual tolerance for risk and the amount of time one plans to dedicate to trading currencies.

The most common type of account is the standard one. It allows trading standard lots of currency and standard leverage. The term lot refers to the minimum amount of currency that can be traded and standard lots consist of 100,000 units – this will be a $100,000 trade if you are trading in US dollars. The mini lot has a size of 10,000 units and there is also a micro lot of 1,000 units. The mini account will then allow clients to trade mini lots, while micro accounts allow even smaller transactions to be made.

Each type of account also has a minimum capital requirement, which varies across different brokers. For instance, micro accounts may require having a minimum balance of $100 to open a trade. Then, a mini account would require an account size of $500 or $1,000, while standard accounts often have higher capital requirements – $10,000 or even more.

Managed Accounts

Managed accounts are quite popular in stock trading and among high-net-worth investors or simply among those who hire a wealth management firm to manage their savings. With managed accounts, our portfolio of assets is managed by a professional investment firm. In other words, the capital is ours but our broker, financial advisor or dealer makes the buying and selling decisions.

For many Forex traders, such a concept sounds counterintuitive since even a professional broker may end up losing your capital. For this reason, there are certain rules that protect client funds from poor management. There are two main types of managed accounts – pooled funds, where the traders put their money in a mutual fund, and individual accounts, also known as separately managed accounts.

While these account types seem very attractive since they provide you with professional guidance and low risk, they come with higher costs. Account managers charge their clients a commission, which may be fixed or calculated as a percentage of the entire portfolio and in certain cases, it could exceed several thousand dollars per year. Moreover, managed accounts were not designed for those who wish to trade Forex – they are suitable for managing one’s wealth.

Islamic Accounts

Some Forex brokers also offer an interesting type of trading accounts called Islamic accounts. Also known as swap-free accounts, they are intended for Muslims who want to trade on the currency markets without breaching the religious canons of Islam. According to Sharia law, usury – the practice of lending money at a high-interest rate, is forbidden. In fact, receiving profits from interest is not allowed at all in Islamic law.

Typically, there is a commission or rollover interest charged by a broker for extending a trader’s position overnight. Islamic trading accounts are simply those accounts that operate without these standard interest payments.

Funding a Forex Trading Account

Once the trading account is live and verified, traders can start buying and selling on the Forex market. Of course, they will need to fund their account before that – otherwise, they will be able to only simulate trading with virtual funds.

Account Base Currency

One of the first things we need to consider when opening a Forex trading account is the account base currency we are offered. This is the currency brokers allow accounts to be registered in and usually, licensed, trustworthy brokers support at least several different currencies such as USD, EUR, or GBP.

Some firms offer their clients even a greater choice, especially if they are based in countries with other national currencies or they target clients from said country or region. Canadian Forex brokers, for instance, would probably process payments in CAD, while brokers in Japan would support JPY payments. Clients are, of course, free to choose a currency they prefer but the smartest move is to pick the same currency their bank account or credit card is in. The reason is very simple – to avoid paying extra for currency conversion.

Payment Methods

The other thing that should be taken into account when choosing a Forex broker is the payment methods available on the platform. After all, the financial aspect of trading is what matters the most for the majority of traders. To start trading, they need to make a deposit into their trading account through a safe and reliable payment method.

Many Forex brokers – practically all of them, offer traditional ways to deposit such as wire transfer, online bank transfers, and credit/debit cards. Credit cards by Visa, Mastercard, or Amex are the most preferred method of the three simply because everyone has at least one card and the transactions through it are fast, highly secure, and reliable. Moreover, withdrawing funds from your trading account to your credit/debit card takes up to 3 days, whereas it may take more than a week with a bank transfer.

Another great payment method supported by an increasing number of online Forex brokers is the e-wallet. This a relatively modern way to make or receive payments online and it is extremely fast and secure. Popular e-wallets include PayPal, Neteller, or Skrill, and they can be used almost anywhere around the world.

Leverage and Margin Requirements

Forex traders should also have a good understanding of two fundamental concepts when they are opening a new trading account. These are margin and leverage. Sometimes, they are used interchangeably but in fact, they are not synonymous.

Margin is the specific portion of funds traders are required to keep in their account while having an open position to make sure they can cover the potential loss of the trade. Leverage, on the other hand, represents the funds brokers lend their clients to increase the potential profits of a successful trade. In other words, with leverage, traders can trade much larger volumes than they would if they use only the capital they own.

Each different account type – standard, mini, or micro, comes with different leverage and margin requirements. Standard accounts usually allow higher leverage to be used, while mini and micro accounts are associated with restricted leverage (up to 5:1 or 10:1) and higher margin requirements.

Where to Open a Forex Account

Some traders will probably be tempted to sign up with a broker that offers low pricing, bonuses, and overall better trading conditions while requiring less information upon registration. Whenever they find such a Forex broker, however, they should not hurry up to open an account because the website and the firm might not be legitimate. In most cases, such brokers are either not licensed at all – which means, they are not compliant with any national or international law, or they hold a license from jurisdiction of questionable reputation.

It is possible that such Forex brokers are simply an illegal scheme and traders are likely to become victims of fraud. There have been multiple cases of such nature in the past and these types of schemes will continue to exist as long as there are people who sign up and make deposits. So, traders should remember that if they notice anything suspicious about a particular brokerage, they should simply look for another, more trustworthy firm.

Usually, the final step of account registration includes risk disclosures and warnings. Traders should take this part seriously because Forex is considered to be one of the hardest investment activities for beginners. It is highly risky, especially for those who do not have a deep understanding of the market and the rules that govern it. Often, traders who are a little bit too enthusiastic and not cautious enough can lose their money within hours.