Account Types – Day Trading Accounts Explained

Trading accounts, and account types, can vary immensely between different brokers. From cash and margin accounts, to retail or professional accounts, the best choice is not always clear. Here we explore all the account options, including some of the broker specific “VIP” or “Gold” accounts and explain your options.

Best Trading Accounts

The leading US trading Exchange. Nadex offer genuine exchange trading to US clients on Binary Options. Fully regulated by the CFTC. boast a global reputation. Regulated in the UK, EU, US and Canada they offer a huge range of markets, not just forex, and offer very tight spreads and a cutting edge platform.
NinjaTrader offer Traders Futures and Forex trading. Use Auto-trade algorithmic strategies and configure your own trading platform, and trade at the lowest costs.

Retail Trading Accounts

In the main, retail traders are individual traders with no direct working experience of day trading and they often rely on the knowledge and education picked up from broker sites. Most retail traders will conduct trades with their own cash and may trade a variety of equities, such as stocks, forex or options.

When it comes to the different trading accounts available to retail traders, shopping around for the most appropriate online broker is essential. Different brokers apply varying platform charges, and these may include a fee for use of the platform or commission per trade.

Costs of trades are often built into the buy and sell ‘spread’, and are not seen as fees.

Many platforms also provide regular buying tips and a useful knowledge base which can broaden the education of retail traders.

ESMA Limits

The European Securities and Markets Authority (ESMA) has imposed a variety of limits on retail traders in an attempt to reduce losses. These include leverage limits of:

30:1 on all major currency pairs (Forex accounts)
20:1 on the major indices or gold
10:1 on all commodities excluding gold
5:1 on shares
2:1 on cryptocurrencies

These limits will only apply to trading accounts in the EEA, using a broker regulated in Europe. Popular trading regions classed as ‘Non-regulated’ by ESMA include Singapore, Australia, India and Canada – they are still well regulated regions, just not under the ESMA jurisdiction.

Bronze, Silver, Gold Levels

Retail traders will find that different broker brands offer various incentives to frequent traders, and these generally relates to the level of account. For example, traders achieving their broker’s Bronze, Gold or VIP status accounts will have different terms and conditions to other traders.

This could provide reduced rates for trades, access to a premium server with higher speeds, or perhaps a dedicated account manager. All these perks can be a valuable account incentive for day traders, however, they are still not equivalent to being offered a professional trading account.

It’s also possible to set up a cash account or a margin account.

Cash Accounts Explained

Cash accounts are limited, so traders can only utilise the funds deposited to the account. These can be very useful for beginner traders as they will prevent any loss of unaffordable capital.

Trading On Margin

If you open a margin trading account, you will be given a credit line by the broker. This can help increase any potential gains, but also means traders run the risk of losses that may not be affordable. These types of account are usually governed more strictly, as most brokers request a minimum investment prior to any margin trading. It’s also possible that a margin call may be made by the broker in which a higher deposit is demanded to cover any potential cash losses.

Professional Trader Accounts

Professional trading accounts are only available to traders with proven levels of expertise and a certain amount of available investment capital, usually a minimum of £500,000. With these accounts, the European Securities and Markets Authority (ESMA) restrictions are removed and traders can leverage funding of up to 1:5,000 for a variety of trades. However, it’s important to note that there is no form of regulatory protection in place for professional traders.

It is assumed these experienced investors can manage their own affairs and choices with regulatory limits. This includes the ability to trade higher risk products, such as binary options.

No Restrictions Outside Of Europe

For the avoidance of any doubt, it should be noted that ESMA restrictions only apply within the EU, so leverage levels in non-European and non-regulated jurisdictions are unaffected.

This is the reason many European brokers made the decision to move offshore after the stringent leverage regulations introduced by ESMA. Brokers offering binary options have traded offshore for many years and many forex and CFD brokers are now following suit.

Brokers offering leverage as high as 1:1,000 tend to be based in the Australian region (Regulated by ASIC), the Seychelles and Belize. Retail traders will discover it’s advisable to start trading at leverage levels of around 1:10 or 1:25 in the first instance, in order to minimise potential losses.

Ways To Avoid ESMA Limitations

As already noted, switching to brokers based in locations that are not impacted by EU legislation is one way to avoid the leverage requirements set by ESMA. It should be recognised, though, that these regulations were put in place to protect retail traders and reduce financial risks. Traders should definitely not feel tempted to move to unregulated brokers in order to avoid leverage rules, as this is unsafe and there are other options.

One option is to find out whether your current broker already has offshore or non-EU subsidiary brands. Many brokers have lots of regulated brands under their “umbrella”, so moving your retail account to a jurisdiction outside of the EU or offshore is quite possible. You will just need to get in touch with your existing broker to find out more about any other brands they operate within acceptable locations.

Another option is to look at the new products and alternative products launched to the market. For example, IQ Options launched FX Options at the time the binary options trade was banned in the EU and this is very similar in character.

Finally, retail traders looking for a way to avoid the ESMA bans could look to become professional traders. Not all retail traders will have this ability, but the downside of becoming a professional trader is that no regulatory protections are in place.

Professional traders will need a minimum of two years’ trading experience in a relevant financial role and a minimum level of available funding, generally around £500,000, but this can be split between several accounts. Achieving professional trader status means higher leveraging options will open up on binary options, forex and CFDs.

Other Account Types

Some of the other types of trading account on the UK market include PAMM accounts and Micro trading accounts.

PAMM accounts

PAMM accounts are used for forex trading and are an ideal solution for time-poor investors. These accounts utilise a shared pool of cash for forex trading. Trades are conducted by experienced traders and investors can generally choose the trader they want to handle their capital.

PAMM stands for ‘Percentage Allocation Module Management’. This model spreads the sizes of trades relative to the allocation percentage.

A MAM account does something similar, but allows the fund manager to manage multiple trading accounts.

Micro Trading Accounts

Micro trading refers to lower transaction trades in CFDs and currencies. They are a good way to begin trading in forex and for experienced traders who don’t have much time to devote to transactions. Smaller lot sizes and margin requirements makes them attractive for beginners or those new to trading a particular market.

Demo Accounts

We have a full page on demo accounts. The perfect starting point for most traders. Any brand worth their salt will offer a free demo account, so take advantage and try as many as you like before choosing the best live account.

Managed Accounts

Managed accounts, particularly forex managed accounts, can be a risky area. Handing trading responsibility to someone else is fraught with danger. If that person is also employed by the broker, there is a conflict of interest too. Beware of false promises, or guarantees of instant wealth.

PAMM and MAM accounts are less risky, as they are regulated more stringently and the conflict of interest is removed due to brokers making money based on volume rather than losing trades.

Some high level accounts, such as VIP accounts, may involve an account manager – but this is not the same thing as a managed account.

Copy trading and social trading are not really managed accounts, though they can facilitate automated trading.

In general, it is best to take responsibility for your own trading.

ECN Accounts

An ECN account gives you as a trader direct access to the markets, without going via a market maker (as most brokers are). This generally means the tightest spreads, but also means complex trading platforms. IC Markets are an example of an ECN broker.

DMA – Direct Market Access

A DMA account is very similar to an ECN account – as the name suggests, you get direct market access – but ECN trades are placed direct to the market via an anonymous network, whereas DMA accounts have contracts with a specific liquidity provider.

Further Reading