Understanding the Protected Forex Trading Account

By: Andrew Shiveley

When you have been trading the online currency market for as long as I have, you begin to gain an intuitive sense of when something seems out of place or sounds too good to be true. The forex market is still largely unregulated, so brokers and companies offering training can make off-the-wall hyped up claims and there will be nobody like the Securities and Exchange Commission (SEC) to step in and put them in their place (especially if the broker is not based in the United States).

When I first heard about the protected forex account, it was promoted as being a "risk free" investment, and when I heard those two words there were alarms going off in my head because as a seasoned trader I know that there is always risk associated with forex trading. So being the curious guy that I am, I decided to research a bit about what this type of account is all about, and from what I have seen it turns out that this type of forex trading setup actually is legit because it turns out to be a win-win situation for the broker and the trader in kind of a clever way.

Let's start by defining exactly what a protected forex account entails (and this is information that I could only find from one broker, so it may not be accurate for all brokers offering this type of account). The terms of the protected forex account are as follows:

The protected forex account is much like an introductory APR rate on a new loan, as it is only a nice hook to pull in new traders. The broker will allow you to fund a mini account with up to $500, and you can trade with the typical level of 100:1 leverage. For the period of two weeks, you will be given a kind of "test run" for your trading account, and the broker will cover any of the losses that you sustain over the two week period. If your trading turns out to be profitable over the two weeks, you get to keep all of the profit in your account and continue to trade normally, at which point the regular trading rules apply again.

This is a good option for beginning traders because it functions like a funded demo account: it is impossible to lose money during this period because the broker will cover your losses if your account balance turns out to be negative. Many traders are still skeptical though, and one of the main questions that I have heard some forex traders ask about this type of account is "How is a broker able to offer this kind of setup and not lose a lot of money doing it?"

Remember that this type of account is available only for a two week period, and it is only available to a trader one time as an introductory offer, so they cannot keep going back again and again to take advantage of risk free trading. The reason the protected forex account is structured in this manner is to allow demo traders to ease into trading with real money without the fear of loss, and the maximum amount of money that can be put into a trading account is $500, but since most of these traders are filled with trepidation (or they would not be demo traders in the first place!) they will probably only put around $200 into the account. The most money that the broker can possibly lose with this kind of setup is the amount of money that the trader puts into the account, and that would only be when the trader is so bad that they run their account down to a margin call in two weeks.

On the flip side, if the account turns out to be profitable, what the broker has done is turned a demo trader into a confident live trader that is not afraid to trade with real money anymore. And because the broker makes a small amount of money on the spread for every trade that is placed, the amount of money that can potentially be earned from a single trader over a lifetime just from the spread alone is tens of thousands of dollars. So in the eyes of the broker this is a good investment because they can potentially gain thousands of dollars over the course of a few years (along with developing a trusting relationship with a new trader) by risking only a few hundred dollars, and it is good for the forex trader because they can progress from a demo account to a live account without the fear of losing money.

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