Different Types of Trading Account
Eighth session of Forex Training
Welcome back to Forex professional training in financial markets.
In this session we will discuss different types of trading account and how to choose one, as well as Micro Market or Market Maker in Direct or STP accounts.
Many people who would like to open an account with a broker and start their business do not know how to choose their accounts.
Hopefully at the end of this session you will feel more confident about making the right choice.
Fixed Spread Account
The first type of trading account is a Fixed Spread account. For instance, the least spread amount is usually from 2 pips on EURUSD, in an unstable market with lots of sharp ups and downs they do not change, just remain fixed.
Spread is an amount with 4 digits. Brokers usually offer spread to their customers without any changes in value, hence they guarantee the value against extreme fluctuations on different types of customer’s orders such as pending orders, and especially on Take profit and Stop loss in an order.
Floating spread Account
The second type of trading account is a Floating Spread Account. They start with a smaller amount than the fixed spread accounts.
For instance, on EURUSD it starts from 1.5 pips, however, when the market is experiencing extreme fluctuation, spread rises to a considerably higher amount. In this case for EURUSD it is 3 or 4 times more than its minimum value, This is known as ‘spread widening’.
These accounts are usually in a 5-digit format, which makes them easily recognizable. Due to fluctuations within the market the spread margin changes.
As this margin changes it directly affects your orders, which may result in the automatic opening or closing of any orders you have.
The third type of trading accounts is a direct account.
They are split into:
- STP or Straight Through Processing accounts;
- ECN or Electronic Communication Network accounts;
- NDD or Non Dealing Desk accounts.
Based on these accounts, brokers claim that they offer straight accounts to the market and there is no manipulation involved.
This basically means, all losses and gains are a direct reflection of the market and broker has nothing to do with the process.
These types of accounts are also in a 5-digits format and transactions are made very fast as it is an interbank connection that a party deals with.
Types of Commission and Spread
What you must know about these accounts, is that some brokers only collect the spread, others collect a mix of spread and commission, while some only collect commission.
Now if we look at some websites here, for instance in Exness, you can see what the initial amounts are in standard, cent and mini accounts, and it shows zero for ECN accounts that usually deals with brokers’ commission.
Now let’s go to the FIBO group website, as you can see, there are a variety of accounts here, fixed, floating, NDD and STP.
The minimum spread for a fixed account is 2, for floating is 0.8, for NDD and STP it starts from zero. There is a commission charged which is 0.003% of the total.
Take a look at another broker’s website, Alpari-Forex, again account balances are clearly displayed.
Disadvantages of Direct Account
Now let’s talk about the disadvantages of the direct accounts. Brokers usually advertise very much on these types of accounts and encourage customers to open these accounts, floating and especially ECN.
However, you should know that these accounts are usually a good choice for financial institutions with a huge amount of capital, not for individual parties.
This is because these accounts usually include a dramatic increase in spread, not like floating accounts in which spread can only be widened to a certain value.
For instance, in EURUSD it can go up to 29 pips and in the gold market it can go up to 120, 130, or even 150 pips.
They can also have a rapid drop in leverage when the market is experiencing an extreme fluctuation and they can decrease to the ratio 1:25 (1 to 25)
For instance in ECN accounts, as you can see, the leverage value is not constant and can drop at any time.
This is very dangerous for the account and the account holder. So you should be 100% focused when choosing an account.
The most dangerous time in which a party can make great losses is when they have a pending order.
This is because orders have not been 100% determined yet, and can be established at any time; there is always a huge risk that the spread will go up.
And again, when closing an account, a leverage drop can be dangerous that can cause serious problems for the investors.
Market Maker (Dealing Desk)
Well, it is time to introduce the Market Maker or Dealing Desk to you. Investors usually have a lot of questions about them and how they work.
Basically we are going to compare the Market Makers with the STP. The abbreviation of the market maker is either shown as MM or DD (Dealing Desk).
They are brokers that accept the risk of holding a certain number of shares of a particular security, in order to facilitate trading in that security.
This means all transactions are based on brokers risk management and not based on a particular type of account.
They are not related to type of the account such as floating spread, fixed spread or STP. There are many false beliefs regarding this area.
Some say that with market makers, orders are not received and every single one will be processed first; or that customer’s profit is equal to brokers’ losses, and in STP accounts, brokers can only take their commission; or that the accounts with 4 digits will not make it to the market and only 5 digits accounts are eligible to be in the market.
As mentioned before, these are all false beliefs and in order to make things clear for you we will illustrate all brokers’ activity in the future.
The reality is that a fixed spread account is the best possible account for customers, in order to work in this market free and clear.
The service that reliable brokers offer to customers is most suitable value and the best possible offers regarding the buying and selling process.
They also share the information, such as bank’s prices with their customers instantly.
They offer the best possible offers to their customers to make things easier for them in making their trades.
They can also control the leverage and cash float value via the internal transactions and keep spread constant.
“Noises” in the market are what we call an anomaly in the market, a price listed higher than all the others and out of place; these are filtered out for you.
We should mention again that with reliable brokers, your gains and losses are not affected by your account type whether you predict the market trend faultlessly or incorrectly.
The broker will process your order as soon as you make it, and according to the market and capital float at that time, you either make profit or face some losses.
You should also know that there is always a great number of advertisements for floating and ECN accounts, which, as we said before, are not suitable for customers comparing with fixed spread accounts with more convenient and beneficial specifications.
Knowing all this should make it a lot safer and easier for you to accomplish your goals.
That concludes this session, until next time and another session take care.