The Advantages of Opening a Micro Trading Account
When novice traders are first starting out, they are always strongly encouraged to start with a demo account. This type of account allows them to trade with imaginary money, while still experiencing real market conditions. However, the problem with demo accounts is that both the profits and losses are also imaginary – in other words, traders using demo accounts do not experience the emotional stresses of working with real money. Since emotional control plays a large part in becoming a successful forex trader, demo accounts often do not accurately predict how traders will perform once they start to trade for real.
A stepping stone to real trading
One way that traders can overcome this difficulty and more accurately gauge how well they will trade is to use a micro or cent account. With this type of account, the trader receives the same quotes and experiences the same conditions that they would with a regular account, except that they trade in cents, rather than dollars. In other words, while they are still risking money, the amount that is at risk is 1% of that with a dollar account.
Cent accounts were originally developed so that traders could test different trading systems without significant risk, but most forex brokers also make these available to new traders, along with demo accounts. Because of this, they form an excellent steppingstone to real trading. However, traders who are still learning should still be cautious of the results, since emotions tend to be weaker when trading small amounts rather than larger ones.
However, a cent account does have the advantage that traders get used to dealing with large absolute numbers – many thousands – even if they are only cents rather than dollars.
So what about mini accounts?
Some traders get confused between the micro and mini accounts, both of which are usually available from their forex broker. These are also quite popular with traders who are still learning their craft, but the amount of money that is traded using a mini account is significantly higher than with a micro account.
Rather than trading lots – 100,000 units – mini trading accounts deal with tenths of a lot – 10,000 units. This means that a single pip movement in a currency pair denominated in US dollars is the equivalent of $1, whereas a single pip is $10 with a standard account. This allows newbie traders to make that next step up from a cent account – for instance, it is perfectly reasonable to open a mini account with as little as $250 – a risk that most novices can tolerate.
The other advantage of a mini account is that it gives finer-grained control over trade sizes, even for established traders. For example, if a trader wants to trade 250,000 units because this is the optimal risk profile, they cannot do this with a regular account – they would have to trade 200,000 or 300,000 units. With a mini account, they can simply trade 250,000 units – or 25 mini lots.