The flexibility and high-profit potential of forex trading are the key attributes that make it an attractive option for online traders. Being a forex trader you get the opportunity to participate in the buying and selling of international currency pairs. You earn profit from the favourable fluctuations in exchange rates as you anticipate the potential price movements of the currency pair being traded. For currency trading, you just need to sign up with a forex broker and open a trading account on any of the popular platforms. If you are a beginner, then MT4 would be a good platform for you as it is easy to use and has a lot of tools that appeal to novices and professionals alike.
To add to the flexibility, forex brokers offer different types of trading accounts as each trader has their own requirements and preferences for trading conditions. One such account that has become a highlight for many traders is an Islamic forex account. In this article, I will share some relevant information about this account type along with a step-by-step guide to open an Islamic account.
What is an Islamic forex account?
Islam is the 2nd most followed religion in the world and the Muslim population around the world are also interested in forex trading. But they have to stay true to their beliefs and religious values while engaging in any activity which also includes financial endeavours. Thus, Islamic finance has become a topic of discussion as it talks about some rules and principles that need to be considered in financial dealings and it also applies to trading. Any transaction or dealing that involves interest charges in any form is considered to be ‘Haram’ (forbidden) as per Sharia law and thus Muslims should refrain from paying or receiving interest in any situation.
In forex trading, the trading instruments are currency pairs and the interest rate differential between two currencies in a pair is considered in trades when the position is kept open for more than a day. The trader will either receive or pay the swap fees based on the currency pair chosen for the overnight position. The swap rates are different for different pairs and it also considers the number of days for which the trade is kept open. Since earning or paying interest is prohibited in Islam, the application of swap rates will not be acceptable for Muslim traders. Thus, forex trading on a regular or traditional account will be hard for Muslims as they can only stick to day trading. But Islamic forex accounts remove this limitation by replacing swap with a flat rate admin fee which is the cost of keeping the positions open for a longer duration.
This is a swap-free account and you won’t be paying or receiving any type of interest for any trade even when it is kept open overnight. Apart from this, Islamic forex accounts only work with spot trading based on the rules of Islamic finance and reduce risk and uncertainty by putting restrictions on trading instruments and leverage. Hence, Islamic forex accounts are compliant with Sharia law and you won’t have to worry about breaking any rules while trading on these accounts. They are specially designed for Halal trading and also for making the forex space more inclusive by making market access easier for Muslims.
Now, let’s have a look at the simple steps for opening and using an Islamic account.
- Choose an Islamic Forex Broker
The first thing you have to do to open a forex trading account is pick a broker who suits your requirements. For an Islamic forex account, you will have to look for an Islamic forex broker or a Halal forex broker. A broker who provides Halal trading conditions by offering swap-free accounts to their clients is called an Islamic or halal forex broker. Because all brokers do not offer this type of account you will have to filter your options based on the brokers that fit this criteria well. Make sure the swap-free account offered to you is well-aligned with Sharia law and don’t forget to check other trading conditions and costs including spread, commission and admin fee for overnight positions.
You should also consider the regulatory status of the broker as a regulated broker is a secure option and Islamic finance also talks about not having uncertainty in financial transactions. You should also try out the trading platform and tools that are offered by the broker. The broker should also have a responsive customer support system to answer your queries and solve any issues. All of these aspects are important to ensure a seamless trading experience. You do have quite a few options to consider when it comes to Islamic forex brokers. So, take your time and make a wise choice based on your trading goals and trading style.
- Proceed with the registration process
The next step is proceeding with the registration process of account opening. You will find the Islamic account section on the broker’s website or you can let the broker know that you are looking for a swap-free account. Because some brokers will be granting the swap-free status after account opening only. You will have to provide all the required information including personal details like name, residential address, phone number, and email along with valid ID proof soft copies or details for online verification. After the KYC procedures, you will receive the credentials for logging into the trading platform via email.
Another thing to note here is that certain brokers put regional restrictions on the offering of swap-free accounts and you need to check if the chosen broker provides Islamic accounts in your region. They also reserve this type of account for their Muslim clients exclusively and hence they may ask you to submit additional documents to be sure. Other than this, the account opening process is simple and can be quickly completed just like how you open a regular trading account. Just make sure to read the terms and conditions before signing up and always trade on the demo account first before going live.
- Select the primary account type
There are different types of accounts in addition to the Islamic account. Some brokers will let you choose between these primary account types for halal trading. This includes brokers providing micro accounts for trading with smaller capital and small position size, zero-spread accounts where you only pay commission and commission-free accounts where there are only spreads with a markup. Such options are added for personalisation as many traders have a preference for such conditions. If the broker provides different trading platforms like MT4 and MT5, you can choose the platform that you are comfortable with and open an account there.
Don’t forget to check the trading styles supported by the broker and the trading instruments offered. Bonds, futures and risky assets like exotic currency pairs will not be available on Islamic accounts. The exotic currency pairs also have higher swap rates and hence brokers may not offer them on Islamic accounts. All other currency pairs and assets that the broker offers will be tradable on your Islamic account without the application of interest in any form.
- Funding and trading on your Islamic Account
The 4th and last step in the process is funding your Islamic forex account as that is essential to trade any instrument in the live market. You will have to meet the minimum deposit requirements set by the broker to activate your account for trading but make sure you have enough funds to cover the cost of trading along with the margin requirements. Some brokers ask you to deposit the minimum amount before making the account swap-free. In that case, your account will be given swap-free status after the first deposit is made.
When it comes to trading on an Islamic account there is not much difference except the absence of a swap or rollover fee. Just make sure to follow a cautious approach and employ a sound strategy along with a solid risk management plan to safeguard your funds. Because Islamic finance strictly prohibits gambling and you need to make rational decisions based on analysis and only enter trades when you are certain about the outcomes. Always place a stop loss to cut your losses early and take profit to lock your profits. You can also ask for guidance from any Islamic finance expert or shoals if you have doubts about the scope of Halal trading.
Summing Up
With that, we have learned all the relevant information about Islamic forex accounts along with the 4 steps that you need to follow to open this account. Choosing a suitable broker makes the rest of the steps easier for you as they will help you to complete the account setup process real quickly and you can get into trading right away. But don’t forget to indulge in learning and research if you are a beginner as that is essential to succeed in your trading journey.
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