Pros and Cons of Trading Forex in an Overseas Account
December 20, 2016
Trading forex in an overseas account has become popular mostly in the United States as, starting with mid-2010, the Commodity Futures Trading Commission (CFTC) made brokers change the trading conditions offered to their customers. The CFTC is the governing body in the United States when it comes to future contracts and the forex market is subject to its regulation.
The very idea was/still is, to protect traders. That is, in the case something goes wrong with the trading process, customers will be subject to conditions that are supposed to favor their interests.
Depending on how you look at this aspect, it may or may not be true. Such regulation comes with leverage restrictions and other imposed conditions that may limit the trading strategy at one moment of time.
To avoid this, US traders have the possibility to open an overseas account. This means that they will open a forex trading account with an entity that is not subject to the CFTC regulation.
Advantages of Trading with an Overseas Account
There are many advantages that come with opening a trading account overseas, and one of them is the fact that trading is not limited. By limited, it means that conditions are not that tough and strict.
For example, in the U.S. forex traders are not allowed to hedge a trade. By definition, hedging a trade is the possibility to trade a currency pair on both directions (long and short) at the same time.
Hedging may be total (the same volume is traded in both directions) or partial (traded volume is different). There are many trading strategies that use hedging at one moment of time, for example, if a strategy is following multiple time frames on the same currency pair.
This means that at one moment of time it may be possible to have a long trade active based on the daily chart analysis and the need to open a short trade to appear, based on the hourly time frame. If hedging is allowed, both trades can be taken, and by the time the short one reaches take profit, the equity will be influenced only by the long one.
This is an advantage when trading an overseas account. Another one would be that the FIFO rule (First In First Out) is not mandatory in overseas, whereas in the United States it is.
The FIFO rule is having more of a psychological impact on trading but this trading psychology is one factor that many times makes the difference between being successful or not. Some view it as only another restriction, but it can be avoided.
Finally, tax benefits come with trading an overseas account in the sense that taxes are paid only after the gains are withdrawn. Nowadays, you’ll still have to report the overseas account balance if it is bigger than a specific amount, but tax benefits are still there.
Disadvantages of Trading with an Overseas Account
The biggest drawdown comes from the fact that overseas accounts are less regulated. Forex brokers in other jurisdictions are not having that many restrictions and conditions to obey, so regulation is an important factor to consider.
That being said, capital is at more risk in an overseas account than otherwise. The idea behind the CFTC regulation was to provide forex traders with protection against crooks, scams, fraud brokers, etc.
All in all, trading in an overseas account allows forex traders to be on the same level with other forex market participants when it comes to the leverage used, and general trading conditions. However, this comes with a risk that one should consider before going on this path, and balancing this risk against the potential benefits is the decision to be made.