A foreign exchange — or forex — mini account is a low-capital, low-risk account offered by authorized forex dealers to retail traders for the purpose of trading in the foreign exchange market. New currency traders use mini accounts to learn how to trade in a live market environment while perfecting newly learned trading strategies. More experienced traders use this type of account to test out new trading systems and automated trading tools.
Retail traders who do not have enough risk capital to trade using a standard account can use a forex mini account to enter the currency market and gain trading experience. Mini accounts generally can be opened with only a few hundred US Dollars (USD). The liability on mini accounts in the forex market is usually limited to the amount of capital in the account. That is, if a trade goes wrong, the retail trader generally is not responsible for payment of any amount beyond the capital invested in the account.
When using a forex mini account, a trader risks less money on each trade as compared with a standard account. In trading the Euro/USD currency pair, for example, each lot in a standard forex account is worth $10 USD per percentage in points, which is commonly called a pip. In a forex mini account, one lot on the same pair is worth only $1 USD per pip. Therefore, mini accounts do not deliver the same level of profit per pip. The advantage, however, is the protection against large losses, especially during large price swings.
Some trading experts recommend that new traders start with forex mini accounts because of the psychological challenges of trading. Dozens of books have been written on the subject of trading psychology. Fear and greed are commonly experienced emotions among traders, particularly during volatile market movements. Its lower monetary risk means that a mini account allows for a gradual psychological adjustment to large price movements.
The smaller size of a forex mini account and the lower cost per pip help guard against excessive losses caused by trading mistakes, power outages, broker errors or ineffective trading strategies. For experienced traders, a mini account offers a way to test new strategies and trading systems. Forex brokers do offer practice accounts in a simulated environment where no money is at risk, but some traders prefer to test strategies in a live market environment. In addition, some seasoned traders use forex mini accounts to ensure that pre-set stop losses and profit targets will be honored, particularly when switching to a new broker.
A forex mini account is a lower risk option for both new and skilled traders who trade with a solid money management plan. Without a sound trading plan, however, it is possible to lose all trading funds, even with this type of account. This might occur in the case of ineffective trading strategies, trading too large a position in relation to available capital and/or leaving large positions unattended without a stop loss.
