Forex trading has never been easy in the States

Forex trading is a booming industry that anyone can use as an investment vehicle. It has become a highly popular option, especially during the COVID-19 chaos that has kept most people at home during the lockdowns. In fact, during the first half of 2020 a surge in trading volumes was recorded.

To trade currencies online, the services of a Forex broker are needed. The brokers provide clients with free access to trading platforms like MetaTrader 4 or 5, via which trades are executed. Numerous Forex brokers operate across the continents, with Asia and Europe being the most popular locations.

The US is a favourite with Forex companies as a place to do business because of the huge population. Also, the United States is home to some of the world’s largest major financial exchanges. But did you know that Forex trading has not been easy in the Donald Trump era, which has been responsible for the dominance of the USD in the world, both for those few companies left in the States and traders? In this blog, we’ll give you some pointers as to why that is the case.

Rigorous Regulations

The Forex industry is highly regulated in the US to protect the public from fraud and scams. Therefore, any Forex brokers interested in entering the US market have to obtain licenses from and to comply with regulations set by the country’s major financial agencies, the National Futures Association (NFA) and the Commodities Futures Trading Commission (CFTC). Applying for and gaining approval for such has never been easy.

To provide a safer environment for trading Forex, which is a highly volatile market, the NFA and CFTC have implemented stringent rules and guidelines that have pushed Forex brokers away from the US market. In fact, several Forex companies have already fled the US market to shift their operations to countries with more relaxed rules and guidelines.

One of the main concerns of Forex companies is the huge capital requirement set by the US agencies. When obtaining a regulation from European regulators, a broker must have at least $100,000-$500,000 locked capital. But in the US, the lock capital requirement amounts to a staggering $20 million. That is way higher, which makes it extremely difficult for financial companies, especially the smaller ones, to meet the requirement.

Forex trading has never been easy in the States

Limitation on Leverage

You probably know by now the part that leverage plays in online Forex trading. Offered by Forex brokers as borrowed funds, leverage allows traders to access more money, giving them power to trade in larger volumes. Many brokers provide leverage as high as 1:1000 to attract more clients. With such leverage, a starting capital of $100 will be expanded to $100,000 (1000X100). In the US, it’s a completely different story.

Forex brokers must adhere to the NFA’s leverage rule that only allows them to offer up to 1:50 leverage, which is low. Leverage is said to be a double-edged sword – it could either make you or break you. When not used properly it can cause huge losses.

This limitation on leverage limits the ability of FX traders to trade in higher volumes, which in turn can lead to brokers earning lower profits.

Specific Trading Strategies Are Not Prohibited

The UK’s Financial Conduct Authority and the Australian Securities and Investments Commissions don’t prohibit any kind of trading strategies. Traders have the freedom to use any strategies or system they prefer with their Forex brokers.

Forex traders in the US, however, face some restrictions. For instance, the NFA and CFTC prohibit the use of hedging, a trading strategy widely used by traders across the globe. In essence, hedging is when you open a new position on the opposite side of your losing trades.

Forex traditions

The US is an ideal place to do business because of its huge population of over 300 million. However, it may be a challenge for any Forex brokers to enter the US Forex market given the more stringent rules implemented by the NFA and CFTC, which include the $20 million locked capital requirement. Start-up brokers may not have the financial means to meet such requirements. Also, for traders, especially beginners with less capital to hand, the restriction in leverage is far from ideal.

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