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Is Forex trading more complicated if you live in the US?
Although the Forex market did not appear in the US, its history is closely tied to that of the United States. After World War II, the Bretton Woods agreement was signed here to control the exchange rate of each participating country at a fixed value. Later in the 70s and 80s, the Smithsonian Agreement and the Plaza Accord played an important role in adjusting interest rates and the US dollar. And yet, one of the things that many American finance enthusiasts discover when deciding to open a Forex trading account is that the process isn’t that smooth for US citizens. Although Forex is entirely legal and encouraged in the US, and it is estimated that the daily trading volume is around $765 billion, the US is not the biggest Forex market in the world. That seat goes to the United Kingdom, and besides, many other countries, such as Singapore, Japan, and Switzerland, are catching up from behind. In short, this happens because, for the average US Forex trader, there are many disincentives along the way. Fortunately, although options may seem limited, there are ways to work around the challenges and turn Forex trading into a lucrative hobby or career.
Why are there so few regulated Forex brokers in the US?
Before opening a Forex trading account, most people check whether the broker is regulated. In most countries, you’ll find that there are enough options to choose from, but in the US, the number of regulated brokers is staggeringly low. Why is this?
Well, it all comes down to the terms and conditions that Forex brokers must respect in order to get a license. It hasn’t always been like this. Before 2009, there were many Forex brokers that US traders could choose from and the barriers to entry for brokers were almost non-existing. But, when the economic crisis hit, Forex became the subject of scrutiny, and currency speculation was blamed for the state the market was in. The Dodd-Frank Wall Street Reform and Consumer Protection Act was introduced in 2010, and, among others, it changed the way Forex traders were conducted. For brokers, being regulated became increasingly difficult because they had to respect extremely harsh rules and pay unreasonably high fees. As a result, many of them disappeared, leaving US traders with fewer options. In addition to those, American restrictions are quite limiting. For example, a regulated US broker is not allowed to offer value-added services, such as news feeds and trading signals, or to let traders fund their accounts with credit cards.
Fortunately, there is a way to avoid all these limitations and unlock the full potential of Forex trading.
What are offshore Forex brokers, and why are they a great alternative?
Some US Forex traders are happy with what regulated brokers can offer but, most of the time, the best Forex brokers for US residents and citizens are the ones offshore. But what exactly is an offshore broker?
An offshore broker is a broker that’s not registered in the United States. Instead, they are regulated in other jurisdictions, such as Cyprus, Malta, the Channel Islands, or Belize. One of the most common misconceptions about offshore Forex brokers is that they function outside the law, but that’s not true. Offshore Forex brokers must still meet certain criteria to obtain a license, but they’re not subject to the same tight restrictions in the US. The countries mentioned above have more flexible regulations for financial services, so they attract Forex brokers. Of course, this often raises questions about legitimacy, but it’s important to point out that the customer’s rights are still protected. For example, countries such as Belize have established agencies that supervise the activity of Forex brokers to ensure that they don’t scam users. Recently, offshore brokers started to enjoy more credibility, and some of them are even listed on the stock exchange. Being based offshore doesn’t mean that a broker is not unreliable. It just means that they are based in a country that has more flexible regulations, and that allows them to offer access to more trading features.
What factors should US traders consider when setting up an account with offshore Forex brokers?
Many US traders use offshore brokers and make considerable profits. If you find the features of US-regulated brokers too restricting, then going offshore can be a great option. However, financial services are highly subjective and, before settling for a certain trader, there are several factors you should keep in mind. It’s entirely possible to choose a legit broker, but have a bad experience because the broker didn’t match your level of experience or trading style, so a bit of research is essential.
In short, here are the top things to pay attention to when deciding on your Forex broker:
Transaction costs: when you execute a trade, you have to pay a spread or commission. Naturally, many people prefer low transaction costs, but sometimes you will need to sacrifice these costs if you’re looking for the most reliable broker out there.
Seamless withdrawal and deposit processes. Adding funds to your account or withdrawing it shouldn’t be complicated. Time is of the essence in Forex trading, especially if you prefer short-term trading strategies, such as scalping or swing trading.
What trading platform are they based on? Ideally, you should have access to a live news feed, charting tools, and other features that help you make informed decisions and have an accurate overview of the market.
Customer support. Technical support is essential in Forex trading. Whether you encounter an issue or you just have a question about your funds, customer service should be able to assist you right away, regardless of the time zone. Many times, a broker with higher transaction fees, but stellar customer support, is preferable to one with low transaction fees but hardly ever answers your emails.
If you’ve heard about the benefits of Forex trading, but the lack of options has stopped you from creating an account, then offshore brokers are an excellent alternative, as long as you remember to factor in your risk tolerance and trading style.
This article does not necessarily reflect the opinions of the editors or the management of EconoTimes