Different types of Forex trading accounts exist. Depending on the trading style, one account type may be more suitable for a trader than others.
However, there are four characteristics to consider for unlocking the benefits of a Forex trading account:
• Spreads
• Number of digits
• Spreads type
• Commissions
Tight Spreads
An exchange rate shows the value of one currency in terms of another. Each currency pair part of the FX dashboard has two quotes – a bid and an ask price.
If the trader believes that the exchange rate will be bigger in the future than the current price, then the trader will use the ask price to buy the currency pair. It is said to take a long position.
But if the trader believes the opposite, a short position may be initiated as easily. In this case, the trader will use the bid price.
Any open position must be closed at one point in time. This is called squaring a trade, and it is done using the opposite price than the initial one.
As such, to square a long position, the trader uses the bid price. Or, to square a short position, the trader uses the ask price.
Unsurprisingly, these prices or quotes are not equal. The difference between the bid and ask price is called the spread, and it is a fee charged by the broker and paid by the client. The tighter the spreads, the lower the transaction costs.
4-Digit Accounts
The bid and ask prices are two quotations of a currency pair. For a few years now, brokers have offered five-digit quotes, instead of four.
However, some brokers still have four-digit accounts, which is something to avoid when opening a trading account.
A five-digit account (e.g., EUR/USD quote 1.11833) suggests that the broker uses competitive technology such as ECN (Electronic Communication Network) or STP (Straight Through Processing) when routing the customers’ orders to the market.
Fixed Spreads
Spreads can be fixed or variables. The ideal trading account should have fixed spreads and tighter ones too.
Typically, the tighter spreads are variables. Effectively, it means that the broker advertises the lowest spread possible, but it increases significantly during major economic releases such as the Non-Farm Payrolls one in the United States.
Therefore, in order to avoid unnecessary costs during major economic releases, when the market typically moves fast, look for a trading account with stable spreads.
Commissions
A brokerage house acts as an intermediary between the trader and the market. The trader places the orders on the trading platform, and the broker routes them to the market in the search for the best possible execution price.
In exchange for its services, the broker charges a commission.
Commissions vary from broker to broker, as there is a constant battle to have the best technology that reduces transaction costs. As traders strive to have the lowest transaction costs possible, low commissions is something they are keen on having.
