Forex Trading In The US

Forex trading in the US is among the largest and most liquid financial markets. This 2022 guide will focus on the key aspects of forex trading for US investors, including how it works and getting started. We also rank the best brokerages for forex trading in the US.

How Forex Trading Works In The US

Forex trading involves converting one currency into another. Many people and corporations do this to profit from fluctuations in the relative prices of currencies. Currencies are traded in pairs, which means their value is determined relative to another currency. For example, trading the EUR/USD pair involves speculating on the strength of the Euro compared to the Dollar. If the US Dollar were to appreciate compared to the Euro, one dollar would be able to buy more Euros than before.

In the above pair, the EUR is the called base currency and the USD is called the quote currency. The base is always the first currency in the pair to provide standardization and make understanding instruments easier. In layman’s terms, the EUR/USD value is how many USD you could buy with one EUR.

Importantly, forex trading is a big business in the US. Many aspiring retail investors aim to profit from price fluctuations in currencies. However, as we outline below, forex trading in the US is heavily regulated so it is important to find a legal and supported online broker.

Products & Instruments

There are several methods for trading currencies in the US but they can be split into two main categories: spot and derivative. Spot forex trading in the US is measured in lots and involves physically purchasing another currency with USD or vice versa.

Derivatives, on the other hand, allow you to speculate on the price movement of one currency against another without actually transferring ownership of the funds. The main types of forex derivatives are spread betting, options and futures. CFDs, the most popular vehicle for retail forex trading outside the US, are banned within America.

The four most heavily traded currency pairs in the US and worldwide, known as the majors, all include the US dollar. These pairs represent the four next largest and most liquid currencies, paired with the USD. Given these characteristics, the major pairs tend to have tight spreads and high liquidity at top platforms, reducing slippage. Forex trading in the US with ECN brokers, in particular, provides access to raw market spreads, while STP and other execution styles generally involve a higher markup.

The most traded currency pair in the world is the EUR/USD, which accounts for more than 20% of all forex transactions. Unsurprisingly, this is a firm favorite with forex traders in the US.

Other major US forex pairs include:

Regulation When Forex Trading In The US

The United States holds one of the most regulated retail trading markets in the world. This extends not only to the companies that are allowed to sell their brokering services to US clients but also to the assets they can offer. American regulators insist that any company wishing to act as a retail brokerage in the US must hold a license with them, so there are no offshore options you can use to sidestep any regulations. Moreover, there are stringent capital requirements placed on firms looking for a US license, resulting in a small market of companies to choose from.

On top of this, all CFD trading is banned for retail traders in the United States, whether that is within forex, stock, crypto or commodity markets. However, those interested in forex trading in the US through derivatives can still make use of vanilla options, binary options, futures and swaps.

Finding A US Forex Trading Broker

Given the limitations imposed on forex agencies in the US, it is difficult to provide a top 5 or 10 list of the best US-regulated brokers for beginners. While regulations do well to make the industry safer for retail traders, reducing the opportunity to be taken advantage of, it can produce a less competitive market.

Despite the lower number of available firms, finding the right one for your needs is no easy task. This is down to all of the major factors that will influence your trading experience and success, which you will need to consider. We recommend researching the areas below for each company under consideration to best compare them, all the while keeping your goals and limits in mind.

Trading Platforms

Most US forex trading firms offer a range of platforms for use with their services, such as MetaTrader 4 (MT4) and MetaTrader 5 (MT5). While some will offer one or two, others may support five or six, each with its pros and cons for different types of traders.

MT4, MT5, cTrader and TradingView are some of the most popular third-party platforms out there, offering a wide range of functionality and some industry clout along with it. That being said, the proprietary platforms offered by some companies in the US may themselves have advanced features and easy-to-use interfaces for a stable trading experience.

US regulated forex brokers with high leverage
Forex trading on MetaTrader 4

Key things to think about when comparing trading platforms are the number of timeframes, technical indicators, order types, graphical objects and helpful features on offer. You should also consider the software’s interface, execution speed and customizability. Furthermore, if you have your eyes set on automated trading, copy trading, scalping, signals or other specific needs, ensure these are met by the platforms on offer.

Finally, ensure that the platforms are supported on your intended trading device. This can be a desktop app compatible with Windows, Mac or Linux, a browser-based interface that supports Chrome and Edge or a mobile application for iOS or Android devices.

Leverage

Leverage allows you to get involved in forex trading using more capital than is in your account. This form of margin trading uses broker funds to open a larger position to potentially rake in magnified profits, though this will also amplify any losses. For example, a leverage rate of 1:100 would allow you to purchase $100 worth of a foreign currency using just $1, so if the price goes up by 1%, your profits on that position will be 100% ($2).

Maximum leverage rates will vary with different brokerage options. If high leverage trading is an important part of your intended strategy, as it often is for scalping, ensure you can access a high rate to best maximise your profits.

Trading Fees

Forex trading profits are often an aggregation of small gains. Therefore, a small variation in trading fees, such as spreads or commissions, could have a large long-term impact on the results of your speculation. Many companies that accept US traders now offer both STP (wide spreads, no commission) and ECN (raw spreads but commission) accounts. Which of these is best will often depend on your trading volume and approach.

Other important charges to look into are inactivity fees, deposit and withdrawal charges, software costs and overnight swaps, as these can surprise the unwary.

Carefully consider the full fee structure of each option to make the best comparison and calculate which will allow you to walk away with the largest proportion of your winnings.

Regulation

All forex trading firms must be licensed and regulated within the United States to sell their services to American residents and citizens. Many fraudulent companies exist to prey on those looking to get started with financial speculation, operating outside of regulation to limit your legal recourse.

Asset Range

A key aspect of a US forex trading company’s service is the number and range of assets they can offer you. This extends both to the number of forex pairs on offer and the number of asset classes supported. If you are hoping to trade a specific currency pair, there is no point in opening an account with a firm that does not support that pair. Likewise, if your favoured vehicle for speculation is binary options, a spot-only brokerage is no good.

Customer Service

An often-overlooked factor to consider when comparing forex trading brokers in the US is the level of customer support on offer. If you experience technical issues at a critical time for your strategy, you could end up losing money. Therefore, timely and knowledgeable support is a must.

Check that your chosen firm provides support via a convenient method for you, be it by telephone, email, live chat window or post. Online reviews are a great place to check if a broker’s customer support is up to scratch.

How To Get Started Forex Trading In The US

Open An Account

Once you have found the best broker for you, it is time to open an account. This is generally quite a pain-free process, though some firms will require more personal data and take longer to process your request than others. All companies will carry out some level of know-your-customer (KYC) check to ensure you are opening an account legally.

Things to consider at this point are the type of account you wish to open (STP, ECN, MT4, copy trading etc.) if the firm offers several options, and the leverage limit you want to include. You will also need to deposit at this point, funding your brokerage account with capital to get started forex trading in the US.

Choose An Instrument

With all the currency pairs in the forex markets, it can be hard to pick the right one. If you have a strategy that requires one specific pair then focus on this, otherwise, we recommend looking at high-volume, high-liquidity pairs like EUR/USD and USD/JPY. You should also ensure you are using the best asset type for your strategy, be it CFDs, options, spot or futures.

Analyse The Market

This is where you put your strategy into place, analysing the market technically and fundamentally as required. This step can take some time to carry out, especially if the market isn’t spitting out lots of opportunities for you. Here, you will likely be overlaying indicators and graphical objects onto your charts to identify specific price movements. Once an opportunity that fits your strategy has been identified, open a position and stake some money in the forex market.

Employ Risk Management

It is vital to employ careful risk management and consideration if you want to be successful forex trading in the US. Carefully managing risk can make a huge difference to your profit margins, potentially making or breaking your career. We recommend the 1% rule, never opening a position that risks more than one per cent of your account capital. This can be achieved using stop losses and take profits, as well as careful calculation of position sizes and margin levels.

Monitor & Close Your Position

Your strategy should also tell you when you should exit high and take the profit your position has made. This can be done automatically through take profits or by carefully watching the price movements of your instrument. It is also important to know when to cut your losses and exit a failed position before it takes even more from you. Once you have closed your position any profits will be added to your account and losses will be debited.

Taxes On Forex Trading In The US

Forex trading, when done successfully, can bring in a decent income. However, you must understand the tax implications of this before you get carried away with how much money you are making. We have laid out the basics below to give you a feel for it but we always recommend seeking professional help for taxes and legal issues.

Those interested in forex trading in the US through options and futures contracts will often have their positions considered under IRC Section 1256 contracts. These will have results split in a 60/40 ratio, setting 60% of gains or losses as long-term capital results, while 40% are counted as short-term outputs.

Spot traders, on the other hand, are generally considered under IRC Section 988 contracts, which are designated for positions that are settled within two days and so treatable as regular gains and losses.

It is up to you which set of contracts you apply for taxation under at the start of the calendar year. However, once this decision has been made, there is no turning back until the following year, so think carefully. Section 1256 contracts are often best suited to those already in high-income brackets or who perceive a lot of success in the coming year. Those less sure may be better off with 988 contracts, which are more favourable for a year of losses.

Pattern Day Trading

PDT, or pattern day trading, is a tag given to short-term swing traders and active day traders in the United States. The minimum limit to earn this classification is to execute four or more intraday trades with a margin account in five business days. The number of such trades must also constitute more than 6% of the account’s total activity during that period.

Pattern day trading will be automatically defined by your US forex trading broker, when applicable. The system is designed to protect inexperienced retail traders from the dangers of margin trading, carrying heavy implications with it. Pattern day traders must maintain a minimum of $25,000 in their margin account at all times. If their account value falls below this, they must bring their balance back up before they can execute further day trades.US income tax on forex trading

Education

Many major websites and media outlets have real-time coverage and analysis of the forex trading market. For example, the Markets section of the Wall Street Journal provides regular updates on relevant topics. Forex firms that accept US traders will also usually have an economic calendar, which can be used to identify upcoming market events that could influence the value of currencies.

Additionally, involved companies may have tutorials, webinars or FAQs, which can be helpful to many traders, particularly beginners. Discussion forum sites like Reddit are visited by many and may help you find the best forex platforms or provide predictions on future market movements.

Top Tips For Forex Trading In The US

Focus On Both Sides Of The Pair

When exploring opportunities in the forex trading market, speculators must be aware of the supply and demand factors influencing the other currency in the pair, such as the Euro or the British Pound. Considering the latter, demand for GBP may be impacted heavily by interest rate decisions made by the Bank of England. Therefore, anyone trading the GBP/USD pair should keep a close eye on both economies.

One very simple way to analyze the strength of the dollar is to look at the US Dollar Index. This measures the currency’s strength against a basket of major global currencies to provide a holistic value. However, this is a generic strength and you should be aware that a movement in your pair of interest may be outweighed by other pair movements. Therefore, ensure you have several avenues for analysis.

Combine Technical & Fundamental Analysis

Many US traders use technical analysis to identify profitable opportunities in the forex market. Technical analysis involves using charts, drawing tools and indicators to identify trends and fluctuations in the pair’s quote price. This approach is a statistical one, so will not be able to capture sudden, unexpected market movements caused by external events like natural disasters and wars.

Fundamental analysis is the opposite of technical analysis. This approach entirely forgoes any statistical thinking, focusing on tangible, real-world events instead. For example, fundamental analysis will take into account market events, economic news, financial reports and politics, both internal and external. The 2022 Russia-Ukraine war, for example, saw the Ruble slide against the Dollar.

Strategies

Common forex trading strategies include scalping, day trading and swing trading. Scalping is a short-term approach that looks to make a large number of minimal profits from small price movements in the currency. Scalping often makes use of specialist technical analysis and automation.

Swing trading, on the other hand, is a short-to-medium-term strategy whereby speculators will look to profit from larger, slower price fluctuations. Swing trading tends to combine both technical and fundamental analysis to produce a more complete picture of the strengths of the two currencies.

Hedging, a popular approach to managing risk, is common when forex trading in the US. This involves using short-term derivatives, such as options, to minimize the impact of market downturns on a more substantial, long-term position. This can be particularly useful during an uncertain economic or political event, where the impact on the currency’s value is not yet known.

Other top advice includes:

  • Keep a detailed trading journal
  • Keep emotion out of your trading
  • Stay up-to-date and keep learning
  • Look into automating your strategy once it is refined

Advantages Of Forex Trading In The US

  • 24/5 access
  • Widespread support
  • Competitive brokerages
  • Spot & derivative assets
  • Hundreds of possible assets
  • Wealth of online information

Disadvantages Of Forex Trading In The US

  • Broad scope
  • Pattern day trading rules
  • Leverage can be a double-edged sword
  • Limited list of firms that accept US clients

Forex Trading Hours

Forex trading holds a major benefit over stocks, commodities and indices as it is a global market. This means that no exchange controls the market as a whole and you can trade at any time of the week, night and day.

However, bear in mind that certain currency pairs will display added liquidity and less volatility at certain times of the day. This is often dictated by the opening times of the respective country’s major exchanges and any crossovers with the US and European market hours. Always check that your platform and broker’s stated timezones match your own.

Final Word On Forex Trading In The US

Forex trading in the US is a hugely popular financial endeavour, though it should not be taken lightly. It is important to have a good understanding of the key factors influencing the price movements of key pairs, such as economic events, geopolitics and interest rates. Moreover, you should carefully consider your choice of broker, comparing trading platforms, asset ranges, fee structures, customer support and more, to increase your chances of a positive experience.

FAQ

What Is Forex Trading In The US?

Forex trading in the US involves speculating on the relative strengths of different pairs of currencies. This can take the form of physically transferring one currency for another and reverting the transaction at a later date when the rates have changed. Alternatively, many traders opt for derivatives and simply stake capital on the outcome of their speculation and the movement of the forex markets.

Has The US Banned Forex Trading?

Forex trading is perfectly legal in the US, though it is more restricted than in many other regions of the world. For a broker to provide its forex services to US residents or citizens, it must hold a trading license with a US regulator.

What Are The Major US Forex Trading Pairs?

The major US currency pairs are the EUR/USD, USD/JPY, GBP/USD and USD/CHF. These represent the four most liquid and heavily-traded currency markets in the world.

When Is Forex Trading Open?

Forex markets are open 24 hours a day, 5 days a week. However, there are three main trading sessions across the globe: the Tokyo, London and New York sessions. Liquidity is often higher and volatility lower during these peak times.

What Are The Tax Implications Of Forex Trading In The US?

Forex trading in the US does have income tax implications that must be considered. Trading results can be filed under section 1256 or section 988, each holding its pros and cons for different types of traders. You may wish to consult a professional for advice on your taxes.