Why You Need a Forex Account to Trade

A foreign exchange account, or Forex account, is used to hold and trade foreign currencies. Typically, you open an account, deposit money denominated in your home country currency, and then buy and sell currency pairs.

Your purpose, of course, is to make money on your trades. Unfortunately, the majority of beginning Forex traders lose money; they generally spend less than four months reaching the point where they have lost so much that they will close their trading account.

It doesn't mean that the Forex market is a scam, as some critics have maintained, but Forex scams do abound. Making money on highly leveraged currency trades is harder than it looks and, at a minimum, requires developing expertise that many novice traders fail to acquire.

How You Open a Forex Trading Account

The requirements for opening a Forex account have become simpler since the growth of online Forex trading. Today, opening a Forex account is almost as simple as opening a bank account.

First, of course, you'll need to find a Forex broker. All retail Forex trading goes through, and is managed by, a brokerage. Some may be specialized Forex brokers, or they might be the same brokerage you use for stock market investing and trading.

You'll need to fill out a brief questionnaire about your financial knowledge and trading intentions. You'll also need to provide an ID and the minimum deposit that your Forex account institution requires. That's it. You're now free to trade.

Incidentally, many Forex brokers will take your credit or debit card in lieu of cash. So, you really don't need to deposit any money at all—not that this is a good idea. If you don't have the cash now, how will you pay for losses later? Credit card debt carries high interest rates.

Forex Brokers

One of the aspects of currency trading that makes it riskier than trading in the stock market is that the entire currency trading industry is either lightly regulated or—as with some trades—not regulated at all. One consequence of that is that unless you look carefully into the reputation of the Forex broker you select, you may be defrauded. There are two ways of avoiding this problem.

The first is to avoid specialized forex traders entirely and to trade with a general stock brokerage that is active in the U.S. and therefore regulated by the U.S. Securities and Exchange Commission (SEC).

The other way to avoid inadvertently connecting with a fraudulent broker is to proceed very carefully when considering a specialized Forex brokerage. Only open an account with a U.S. brokerage that has a membership in the National Futures Association (NFA). Use the NFA's Background Affiliation Information Center to verify the brokerage and its compliance record.

Even then, it's a good idea to choose a large, well-known Forex broker like Forex Capital Markets (FXCM). FXCM—like almost all of the largest U.S. Forex brokers—offers a free practice account where you can try out potential trades without risking your capital. Some other well-known U.S. forex brokers are CitiFX PRO, an affiliate of CitiBank, and Thinkorswim. Don't be put off by the cute name—Thinkorswim is a division of TD Ameritrade. 

Before finalizing your search, compare commission rates among brokers. Transaction costs are an important factor in the profitability of trading activity.