With an average daily turnover of more than $5.1 trillion, the foreign exchange market is the largest financial market in the world. Available to both institutional and retail traders, it gives them the opportunity to trade a huge variety of currency pairs and to make substantial profits while speculating on economic events and the relative strength of currencies. To enter this exciting business field, however, retail traders need to sign up with an online Forex broker and open a live, real money account.
Most Forex brokers offer two main types of accounts – demo accounts and real money accounts. Demo accounts are mostly used to try out different strategies and tactics or to get familiar with the trading platform used by the broker. On the other hand, real money accounts allow you to really participate in the Forex market. When you open a real money account, you will have to deposit money in it in order to be able to start making trades.
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While demo accounts and simulated trading do not involve any actual money, trading from a real money account without the proper knowledge and strategy poses a real financial risk. This is why prospective traders who wish to enter the world of Forex should be aware of the dangers they will face once they start trading with their own money.
When to Open a Real Money Forex Account
If you have never traded on the Forex market before it is a good idea to start with a demo account until you get familiar with the market and the trading platform your broker offers. Of course, many novices decide to directly start trading with real money and in most cases, they end up losing their initial investment. Trading currencies is difficult and requires knowledge, skill, and experience – after all, there are more losers in the world of Forex than there are winners.
This is why it is essential to know when you are ready to open a live account – until you develop a solid, reliable and profitable system for trading, you should stick to practicing with a demo account. Some traders claim a couple of weeks are sufficient for beginners to learn the mechanics of currency trading. Others believe that this “pretend” trading should continue for anything between 3 and 12 months.
The truth is that some traders never become successful even if they practice for years, whereas some people find it easy to understand the inner workings of the foreign exchange market. Those who want to succeed in this field in the long term should know that if they are not capable of making profitable trades with a demo account, they will certainly lose their investment once real money and emotions are involved.
Things to Consider When Signing Up
Once traders decide to transition from demo accounts to live trading with real money, they need to take a few things into account – what type of trading account they will need, what payment options they have, and how to protect themselves from financial ruin. Depending on the Forex broker they choose to sign up with, they will be offered different trading conditions, although most real money accounts are pretty similar to each other.
It is always a good idea to read the broker’s terms and conditions and make research into the origins of the firm, whether it is regulated, and its overall reputation. This is an essential step, especially with fairly new Forex brokerages. Many traders have been scammed in the past, so it is advisable to try and stick with reputable brokers who have proven their reliability and trustworthiness over the years.
As we have mentioned above, Forex trading can be exceptionally exciting and profitable but to be successful, individual traders need to compete with large banks, hedge funds, and other institutional traders. For this, they need to select the right type of account for themselves since this will directly affect the volumes they will be able to trade, the spreads they will pay, and the level of leverage they will be able to take advantage of.
Based on the minimum and maximum requirements for trading lots, there may be many different account types – standard, mini, micro or VIP accounts, professional accounts, etc. Brokers have different tiered programs for their clients but usually, most traders start with the smallest possible account. This allows them to invest relatively small amounts of money and make small-sized trades.
The different types of accounts have different requirements regarding the initial capital held by the trader, the margin percentage, the minimum required deposit, etc. They also affect the pricing – smaller-sized accounts usually come with higher spreads even on major currency pairs
Another important aspect of real money accounts is banking – what payment options are available, how much the minimum deposit is, etc. In order to invest in a real money Forex account, traders need to check the payment methods accepted by the broker.
Most brokers work with bank transfers, credit cards, and digital wallets. Popular banking solutions include credit and debit cards by leading brands such as Amex, Visa, and Mastercard or e-wallets, including Skrill (formerly MoneyBookers), Neteller, and PayPal. Some brokers’ websites also process Bitcoin deposits and withdrawals. Various other cryptocurrencies are gaining popularity, as well.
However, not all payment methods would support withdrawals, which is why traders should always check the deposit and withdrawal options available. In addition, Forex traders need to check the minimum deposit amount that is required to open a real money trading account. It will vary, depending on the particular broker and the type of account one chooses to register. Beginner traders are advised to start with small deposits of $10 or $50 and gradually advance to higher-tier accounts that require greater minimum deposits.
Using the services of a professional Forex broker is not free, although registering a standard real money account is free of charge. Brokers used to impose fees on every trade but with the emergence of the Internet and online Forex brokers, firms began offering competitive pricing plans to new clients. One of these changes was the removal of these fees – this is specific to currency trading though, there are still different fees when it comes to stock trading, for instance.
Nowadays, most brokers make a profit from Forex trades by making traders pay the spread – the spread is simply the difference in the price asked by the seller and the price offered by the buyer. Sometimes referred to as the bid/ask spread, it is displayed in pips and may range between 0.0 pips for institutional traders to more than 20 pips for trading exotic pairs by retail clients.
Pips (short for point in percentage) are the smallest price movements that an exchange rate can make for a particular currency pair. A pip is usually $0.0001 for major pairs involving the US dollar – if the EUR/USD moves from 1.1050 to 1.1052, for example, then this is a rise in the value of 2 pips. As you can see, paying 3 pips for a trade does not seem to be very costly but it may affect one’s profits significantly in the long term.
Another thing traders must keep in mind about real money Forex accounts is that they will be using leverage, which is among the most attractive and risky aspects of currency trading. In short, brokers offer leverage to their clients by allowing them to trade with borrowed funds. This money on credit is used to control larger volumes than one could afford normally with their own capital alone. For instance, if a trader has a capital of $100 and is offered 10:1 leverage, he or she could conduct a trade worth $1,000.
Traders often see this as a great opportunity to make a lot of money but they risk losing their entire investment in just one or two trades. Although leverage may multiply the profits from a successful transaction, it may also multiply one’s losses. This is why traders should use this powerful tool cautiously after determining the proper leverage level that suits the amount of capital and the tolerance for risk they have.
Many inexperienced traders believe that in order to make the most potential profit out of each trade they need to take great risks. This is a common misconception that often leads to rushed decisions, unnecessary risks, and financial losses. In reality, one of the most important factors for being successful in the foreign exchange market is efficient risk management.
Risk management in Forex is a highly debatable topic that involves different opinions on what proper money and risk management actually is. Since Forex is associated with different types of risk emerging from unexpected market movements, use of leverage, etc., traders need to address various issues and protect themselves against dangers of varied nature.
Determine How Much You Can Risk Per Trade
A common mistake in currency trading, especially among beginner traders, is risking more than they can afford to lose. Being too aggressive in the beginning would most likely lead to huge financial losses. Even if an aggressive trading strategy has worked perfectly with a demo account, there is no guarantee that it would be effective once traders open a real money account and put their money on the line.
This is why traders should carefully determine the correct position size beforehand and set a limit (in percentage or dollar amount) to the money they will risk on each trade. Most experts recommend that novices should risk no more than 1% of their account – for instance, those who have $10,000 in their account should not risk more than $100 per trade. Experienced Forex traders often follow the 2% rule. This way, they can be certain that they would not lose a lot of money even if they make the wrong decision 10 times in a row.
Limit the Leverage
Leverage is one of the most interesting advantages of Forex trading since it gives traders the opportunity to multiply their potential profits from a successful trade. At the same, however, the use of leverage multiplies the potential losses, which is why beginner traders should try to limit the leverage they use.
For instance, taking a 400:1 leverage on a $200 account means you can place a trade for up to $80,000. With leverage of 10:1, the maximum trade that can be made will be $2,000. Clearly, the higher leverage increases the trader’s exposure to risk and if not used correctly, it could result in losing the entire account balance. To limit the risk, novices should stick to smaller leverage ratios such as 2:1, 5:1 or up to 10:1.
The foreign exchange market can move in an unpredictable way and this is more common than you think. This uncertainty is particularly dangerous to those who are just starting with the Forex market because they may not have yet developed mechanisms to protect themselves against excessive losses. One of these mechanisms is known as a stop loss and it is a wonderful tool for limiting one’s financial losses – they cannot be prevented entirely, however.
The stop loss allows traders to close a losing position at some predetermined point. This point will be a specified amount of pips away from the entry price – for instance, if the price moves 50 pips away from the entry price, the stop loss triggers automatically and the trader limits the losses that could be incurred without this function. There are different types of stops in Forex trading but the most common ones include equity stops, chart stops, margin stops, and volatility stops.
Negative Balance Protection
Significant economic events and sudden market movements may drastically affect the value of currencies. In Forex trading, this is particularly dangerous because of the use of leveraged positions by the majority of traders. Due to the high volatility and the huge price fluctuations that may occur, traders can lose their entire equity. Moreover, they may lose more than they have in their account and their balance becomes negative.
When this happens, the Forex broker will ask the client to deposit more money to cover the losses. In case no deposit is made, the brokerage firm will find legal ways to collect the money it is owed. For traders, this scenario certainly sounds unwelcome but it has happened multiple times in the past and it continues to occur in certain countries with inadequate financial regulations in place.
Brokers in the European Union, however, are required to offer their clients the so-called negative balance protection. The measure became mandatory fairly recently but some brokers have introduced it more than a decade ago. It is an automatic response that triggers when clients’ open trades start losing very rapidly – they are automatically closed and the client’s balance is prevented from going below zero. In fact, the purpose of this measure is to protect retail traders even if the automatic close-out does not trigger (these close-outs are usually delayed). Overall, traders should always look for brokers who offer negative balance protection.
Take Profit Orders
Take profit (T/P) orders are commands that are quite similar to stop losses but they have the exact opposite purpose. Stop losses are designed to close a losing trade to prevent further losses, whereas take profit orders trigger automatically when a trade hits a predetermined level of profit. By closing a profitable position at a certain level traders are able to secure their profits from unexpected changes in the market.
It is a good strategy to place a stop loss and combine it with a take profit order that is double the distance from the opening price. If we use the same example from above, we will have a stop loss at 50 pips from the opening price and a take profit at 100 pips from the same entry price. This way we will have a 2:1 reward-to-risk ratio, which is suitable for beginners. Of course, safer levels could be set – 20 pips for the stop loss and 40 pips for the take profit order.
Additional Tips for Real Money Forex Trading
One of the most important things novices should know before they sign up for a real money account is to never rush it. It is always better to begin with a demo account and learn how to trade before they start investing funds into a live Forex account. They should make sure they are knowledgeable and disciplined enough to be able to make real money trades without emotional decision-making.
Another good tip for those who are just entering the world of Forex is to have realistic expectations about the profits that could be made. It is true that some traders are able to earn huge profits in relatively short periods of time – but such fortunate outcomes occur either by chance or after years of experience, professional advancement in trading, and exceptional understanding of the markets. In most cases, of course, success in this field means long-term success, slow progress and, sadly, a long string of mistakes that teach us tough lessons.
Risk management is essential but it cannot guarantee profits on its own. To be successful, investors should develop their own trading strategies and styles, test them and determine which techniques are effective and which ones simply do not work. Trading strategies could be found online, as well, and most Forex brokers also offer plenty of educational content to their clients. Sticking to a plan and a trading strategy will effectively force traders to stop trading on instinct.
One good advice for beginners is to start with one major currency pair and then gradually add more pairs. This tactic would allow them to take advantage of high liquidity – especially if the pair is highly traded one such as EUR/USD. It would also give them the opportunity to experience different market environments and conditions while trading the same pair. Of course, major pairs also come with tight spreads and higher leverage.
After a few months, traders can start slowly diversifying their portfolio and exploring not only new currency markets but also different financial instruments altogether. Most online Forex brokers offer contracts for difference (CFDs) on a variety of underlying assets such as company stocks, market indices, commodities, and others.