How Forex Trading in the US Works
Forex trading in the USA has never been more popular. In fact, the foreign currency markets rake in over 6 and a half trillion US dollars - every single day.
Fundamentally, forex trading involves trading two currencies via a pair. This entails hypothesizing on the pair’s rise or fall in exchange rate value - in the hope of making a profit.
Thinking you would quite like a piece of the action, but not sure where to start? Well, the biggest financial market in the world can seem overwhelming for new traders.
However the truth is with so many trading platforms in the space, anyone with an internet connection can trade currencies - and quite easily too.
In this guide, we are going to cover the ins and outs of forex trading in the USA.
This includes what forex is, how to trade it from the comfort of your own home, and which strategies you need to understand to ensure you remain profitable in the long run. Plus, we’ll review the best US forex broker you can trade with today.
What is Forex Trading USA?
As we touched on, forex trading involves buying and selling foreign currencies based on analysis, trends, and speculation.
You'll be taking advantage of price fluctuations in the currency trading market and predicting the rise or fall of a pair. Speculate correctly, selling for more than you initially paid - and you can make a profit on your trade.
This particular financial market is the largest and most liquid in the world. After all, over $6 trillion per day is serious business. As such, the forex market sees a lot more trading volume than stocks, bonds, and commodities put together.
If this leaves you with more questions than answers, then not to worry. Throughout this guide, we are going to offer various practical examples. This should give you a clearer idea of what to expect when engaging with forex trading in the USA.
Nevertheless, if you're wondering which stakeholders are spending trillions of dollars every day in this marketplace - think along the lines of central banks, hedge funds, fund managers, large financial institutions - and retail and professional traders.
- A professional trader is someone who trades in huge amounts, regularly. This is usually their prime income source.
- A retail trader is your average Joe Bloggs, trading with their own personal money - and using their own trading account.
All you really need to start trading is the internet, a means of paying for your stake - and a bit of knowledge of the market you are interested in. In this case - foreign exchange.
There are hundreds of different methods, strategies, tools, and forms of analysis you can utilize to help you on your way.
We are going to talk about everything you need to know to have the best chance of success throughout this guide on forex trading USA.
Section 1: The Basics of Forex Trading USA
A good place to start with any beginner’s guide is with the basics. Crucially, when it comes to forex trading in the USA, you need to at least have a good grasp of the fundamentals.
For instance, how currencies move in value, and how the price gap of an FX pair is measured (and why this matters).
To begin - you will see below an explanation of how forex pairs are categorized by traders and brokers.
Forex Pairs - Majors, Minors, Exotics
Forex pairs are also called ‘FX pairs’ and ‘currency pairs’. No matter which term is used, it is two currencies battling it out against each other.
Let us give you an example; if you were interested in trading the Euro against the US dollar - this pair would be illustrated as EUR/USD.
The first currency (here the Euro) is always the ‘base’ currency. The second listed (here USD) is always as the ‘quote’ currency.
If you were to conduct your own internet search of the price of EUR/USD you will be quoted a price like this ‘1 Euro equals 1.18 United States dollar’. This means that for every €1, the market is willing to pay you $1.18.
The value/exchange rate of a forex pair is dictated by supply and demand, and supply and demand are motivated by many different real-world factors. For this reason, the quoted price of a currency pair will shift throughout each and every day - by the second.
The price movement if a pair is measured in something called ‘pips’ (percentage in point). This allows trading platforms to measure micro shifts in value.
The difference between your internet search and the price a broker would quote you is a couple of decimal places. This is to allow for those micro shifts we told you about and thus - provide a stage to profit from ever changing exchange rates.
To give you an example:
- Google shows EUR/USD as 1.18
- Via your broker, you would be quoted something like 1.1825
We are going to cover pips in more detail shortly, so stick with us. First let’s talk about ‘minor pairs’, ‘major pairs’, and ‘exotic pairs’.
You will see these terms a lot when both researching and trading forex in the USA. This is how different pair types are categorized universally.
Major Forex Pairs
Major forex pairs are probably the easiest to trade as a newbie. A distinguishing feature of major FX pairs is that they invariably include the US dollar - the strongest and most traded currency in the world.
The other currency in the pair will always be an alternative currency, from a stable economy - such as the Canadian dollar, Euro, Australian dollar, or British pound.
With this in mind, it will come as no surprise that major pairs offer higher volumes of trading and higher levels of liquidity.
We’ve put together a list of popular major forex pairs, some of which you will likely be able to trade at your platform of choice.
- GBP/USD - British pound / US dollar
- EUR/USD - Euro / US dollar
- USD/CAD - US dollar / Canadian dollar
- NZD/USD - New Zealand dollar / US dollar
- AUD/USD - Australian dollar / US dollar
- USD/CHF - US dollar / Swiss franc
- AUD/USD - Australian dollar / US dollar
- USD/JPY - US dollar / Japanese yen
There is a high market demand for major pairs in particular. Whilst it doesn’t necessarily mean that it will be the best option for you, due to major currency pairs being so easy to sell on, you will find low volatility in this market.
Minor Forex Pairs
Minor pairs are far from minor. In fact, they are inclusive of two stable currencies such as the aforementioned. Think along the lines of the British pound, New Zealand dollar, Swiss Franc and Euro, etc.
The key difference is that minor pairs are never inclusive of the US dollar. For this reason, liquidity will be good - but not as much as with majors like EUR/USD.
Please see below a list of popular minor forex pairs, some of which you will no doubt see during your trading endeavours.
- EUR/NZD - Euro / New Zealand dollar
- AUD/CAD - Australian dollar / Canadian dollar
- EUR/GBP - Euro / British pound
- GBP/JPY - British pound / Japanese yen
- EUR/CAD - Euro / Canadian dollar
- EUR/JPY - Euro / Japanese yen
- EUR/AUD - Euro / Australian dollar
Exotic Forex Pairs
This category of currency pair is probably best avoided if you are new to the forex trading scene, due to low trading volumes and low liquidity.
Exotic forex pairs consist of one currency which is considered to be from a stable economy, like the US dollar. The other currency will always be an emerging market currency.
The easiest way to clear the mist is to list some emerging currencies:
- Chilean peso (CLP)
- Hungarian forint (HUF)
- Polish zloty (PLN)
- Czech koruna (CZK)
- Brazilian Real (BRL)
- Mexican peso (MXN)
- Singapore dollar (SGD)
- Chinese yuan (CNY)
- Israel shekel (ILS)
- Malaysian ringgit (MYR)
- South Korean won (KRW)
As you can see, currencies such as the Singaporean dollar, which is derived from a stable economy, also make the list. The reason for this is that the demand for them is nowhere near as high in the forex market.
You will find below a list of popular exotic pairs. Bear in mind though that not all trading platforms will be able to offer access to these specific markets.
- CHF/ZAR - Swiss franc / South African rand
- CHF/RUB - Swiss franc / Russian ruble
- USD/DKK - US dollar / Danish krone
- USD/HKD - US dollar / Hong Kong dollar
- USD/CZK - US dollar / Czech koruna
- TRY/JPY - Turkish lira / Japanese yen
As we have touched on, it is recommended to avoid exotic pairs until you fully understand forex trading in the USA.
At that point, you may well prefer the higher volatility and risk - as the rewards can be fantastic if you time the markets correctly.
Read More: Top 10 Forex Pairs To Trade
Forex Pips USA - Explained
Now that we have detailed currency pair categories, and explained the bare bones of forex trading in the USA - we can dive right into ‘pips’.
We briefly explained that ‘pips’ illustrate the price of two currencies via a major, minor, or exotic pair. This allows your broker to measure tiny shifts in the value of a pair and allows you to profit from small price changes of the respective exchange rate.
Let’s show you an example of a forex pair quote:
- As we said, in its most simple form EUR/USD is illustrated as 3 digits like this: 1.18
- This shows that for 1 single euro, you will receive 1.18 US dollars
- Your broker shows you the same price as something like this: 1.1825
Now, let’s show you an example of pips, using the same imaginary broker quote:
- The trading platform quotes major pair EUR/USD at 1.1825
- Within minutes the same pair is quoted at 1.1828
- As you can see - this shows you that the value of the pair has risen by 3 pips
Not to confuse you, but many brokers actually quote forex pairs in 5 decimal places. This allows them to show even smaller price shifts in a pair.
Here is a super simple example of a 5 decimal price quote:
- Your broker quotes GBP/USD at 1.33405
- Hours later the pair has fallen to 1.33400
- This 5 digit quotation shows that the pair’s value fell by 0.5 pips
To clarify, 5 digit forex brokers in the USA not only allow you to target smaller profits margins, but they also allow the platform to offer "tighter spreads".
Don't worry, we cover the ins and outs of spreads shortly.
Forex Trading USA - Orders
Now you have a clearer grasp on pairs, pips, and the basics - you are going to need to know how to place an order.
It’s all very well having a forex pair in mind, but in order to access the markets, you will need to do so via a broker. Moreover, without placing an order, your broker isn’t going to know what position you want to take on the pair in question.
To reiterate slightly, you need to choose a pair to trade, predict the rise or fall in value, and create the relevant order.
To help you get started, we have put together a list of commonly used orders, with examples.
Let’s start with the compulsory order type - buy and sell.
Buy Orders and Sell Orders
Buy and sell orders are unavoidable when trading any asset, so the same goes for forex trading in the USA.
This most basic of orders is the one which tells your broker which way you believe the market will go. Any other orders after this are optional, but usually a wise move nonetheless.
Let’s take a look at the two outcomes of a buy and sell order:
- You suspect the price of GBP/USD will rise. With this in mind, you must place a buy order
- On the other hand, if you think the pair will fall in value, you must place a sell order
The goal is to sell the currency pair for more than you paid for it in the first place. Let’s take a look at an example.
- You are trading GBP/USD
- You initially placed a buy order on the pair at 1.3355
- A few hours later the pair is valued at 1.3410
- You then place a sell order to closed the trade
- You predicted correctly - so made gains
If, on the contrary, you entered the trade using a sell order - you need to then place a buy order to exit the trade.
Market Orders and Limit Orders
As we said, the first step is usually placing a buy or sell order, followed by optional orders to enhance your trade.
Market orders and limit orders are great for telling your broker when to enter a trade, as opposed to how. You always need to choose one or the other.
To keep things simple, let’s look at an example of when you might use a limit order:
- GBP/USD is quoted to you at 1.3350
- However, let’ say you don’t want to enter the trade at this price, but at 1.3380
- This is when you create a limit order at 1.3380 with your broker
- When (or if) GBP/USD rises 1.3380 - your broker will execute your trade for you
Next, let’s show you when you might use a market order with your broker:
- Let’s say NZD/USD is quoted at 0.69505
- You like that price - so place a market order
- Your broker will place your order immediately
- Because the price of forex pairs shift on a second-by-second basis, there might be a difference of a fractional pip or two. This is perfectly normal in this market
Limit orders enable traders to be super specific about their entry price - and sit back knowing it’s taken care of. On the contrary, market orders allow you to get in on the action immediately!
Stop-Loss and Take-Profit Orders
When it comes to stop-loss and take-profit orders, both are popular amongst forex traders - largely as part of a risk management strategy.
Whilst these orders are entirely optional, there is nothing preventing you from incorporating them into every position you take - especially stop-loss orders.
Like it’s namesake, this order puts a stop to your potential losses. In other words, this allows you to exit your position before you lose any more than you want to.
Let’s give you an example of a time when you would utilize a stop-loss order when forex trading in the USA:
- In this example, you are trading the US dollar against the Canadian dollar
- You enter the USD/CAD position at 1.3140
- You do not want want to lose anything over 1% of your initial stake
- Consequently, you create a stop-loss order with your broker
- When/if the price of USD/CAD falls in value by 1% your broker carries out your order
- This prevents you from losing more than 1%
In terms of take-profit orders, as you no doubt figured - they work in the same way as stop-loss orders, only the opposite.
That is to say, whilst stop-loss orders prevent you from losing too much on your trades - take-profit orders lock in your profit.
For instance, you might want no less than a 3% profit before exiting your trade. Simply create your order at that value, and your broker will carry out your request at the right time.
The aforementioned orders are a great way to manage your risk and rewards in the fast-paced American forex market.
Forex Trading USA - Spreads
We’ve talked about pairs, pips and orders - so this brings us nicely onto ‘spreads’. Much like when trading any asset, there will be a buy price and a sell price. Put simply, the spread is the difference between the two aforementioned prices.
You should familiarize yourself with spreads, as each broker differs. For instance - you might find that a broker offers all of the pairs you fancy trading - but charges the earth in spreads.
The spread itself is generally shown to you in the form of ‘pips’ as we discussed earlier. This is especially the case with forex trading.
Let’s throw out one more example of a spread you might see from your broker:
- Let’s say you are trading the Swiss franc against the US dollar
- The buy price of CHF/USD 1.1022
- The sell price of the pair is 1.1023
- In this example, the spread on CHF/USD is 1 pip
The spread on a forex pair can be viewed as a fee. In this scenario, in order to make a profit, you must make more than 1 pip on your trade.
In the case of brokers who are quoting pairs in 5 decimal places, your spread on the trade will be a smaller fraction.
Here is how that spread would look:
- The buy price of EUR/USD is 1.32110
- The sell price of EUR/USD is 1.32102
- In this example, the spread illustrated for EUR/USD is 0.8 pips
Forex Trading USA Market Hours
When engaging with forex trading sites in the USA, you should be able to find a trading platform that facilitates orders 24 hours a day, 7 days a week.
We do however recommend sticking to the most active market hours if you are a newbie. You will usually find the space less volatile and benefit from higher trading volumes.
World exchange markets such as Frankfurt, London, New York, Sydney, and Tokyo all overlap - constantly opening and closing throughout a trading week.
These multiple local and international markets enable you to trade online 24/7, or 24/5 whatever you prefer. The busiest times for the forex market are at a time when American, UK, and European markets are open for business.
The chances are that if you are trading during these times of higher liquidity, your broker will offer tighter spreads on your forex trades.
Section 2: Get to Grips With Forex Pricing
Now that we’ve covered everything from the basics to orders and market times - you might feel ready to dive right in. We would have to stop you momentarily, as there is much to learn before risking your hard-earned money.
After all, forex trading in the USA is about more than just guesswork. Your predictions should be based on data, research, and the various tools available to you.
In order to be successful, you must obtain a certain level of knowledge on the market you wish to trade.
When it comes to your decision-making process, where there is money changing hands, it’s always safer to make a somewhat informed decision rather than an all-out caution to the wind guess.
This is why getting to grips with the tools available to you is going to strengthen your trading strategy, now and in the future.
With this in mind, we are now going to explain how you can enhance your trading experience via technical and fundamental analysis.
The Importance of Fundamental Analysis
Let’s start with the simplest form of research, fundamental analysis. The crux of this form of research is keeping an eye on the latest news developments.
When you consider the various factors which can affect the price of a currency, keeping abreast of the news is a no brainer.
You should be looking out for economic, social, and political news stories, and anything that may have a negative or positive effect on a specific forex pair.
Think along the lines of political unrest, war, civil disturbance - concentrating on any information you believe could influence the exchange rate of a country’s currency.
A great example of a real-life event having a knock-on effect on a forex pair is Brexit.
Let’s have a quick look at how that played out for GBP/USD:
- In 2015 Prime Minister of England David Cameron announced a possible Brexit referendum in a speech - and news travelled fast!
- That said, the pair didn’t really rise or fall by a great deal.
- Fast forward to midway through 2016, the outcome of the Brexit referendum was made public - over 51% of UK citizens had voted to leave the European Union
- Consequently, GBP/USD dropped in value by more than 11% - in less than a week
The reason that the value of GBP/USD fell so drastically harks back to supply and demand. The uncertainty of Great Britain’s future caused investors to start selling off GBP in their droves.
This meant the market was flooded with GBP, and as a result, it lost value. Such a fast and furious drop in price on such a strong pair was quite remarkable.
We’ve listed a handful of other potential news stories to look out for, all of which have been known to affect the forex market.
- Natural disasters
- Economic forecasts
- A country’s economic strength
- Political instability
- Market inflation
- Interest rates
- Government bond yields
- Terms of trade
- Import and export levels
- GDP growth
- A country’s balance of payments performance
Granted, this sounds like a lot to keep an eye on. However, fear not, there are heaps of subscription services out there. All specifically designed for keeping forex traders abreast with relevant live news updates.
Some platforms will send push notifications via your mobile about the asset you are trading, or you might prefer a more traditional email alert.
Either way, news alert services really are invaluable for forex trading in the USA. You will be made aware of highly volatile market conditions, and the general market sentiment on the currency pair.
As you can see, there are heaps of different factors and events that can hugely affect the supply and demand - and therefore the value of an exchange rate.
Having your eyes open to the benefits of carrying out your own fundamental analysis is crucial. It should be an important part of your own process when speculating on which direction you believe a forex pair's value will go.
The Importance of Technical Analysis
We’ve explained why fundamental analysis is important when trading forex. Now, onto the importance of technical analysis.
Whilst technical analysis is more complex and does take longer to master - it is a superb way to speculate on the short-term price movements in the forex market. Technical analysis is crucial for revealing trends on specific pairs.
This form of analysis is especially helpful for day traders. The reason being that this consists of closing positions within minutes or hours.
Moreover, swing traders also utilize this analysis to view price levels and technical indicators. Keeping their trades open for days, if not weeks at a time - depending on the information obtained.
There is no denying that this analysis is going to help you in the long run, but it can be a bit daunting with so many charts and tools to keep an eye on.
To help start you off on the right foot, we have listed the most useful tools and indicators you can make the most of when forex trading in the USA.
Moving Average Indicator
The moving average indicator (MA) is a tool utilized by millions of traders - especially in the USA. This particular indicator cuts out the extra noise of short term price spikes - instead of focusing on trends and moving averages.
To give you an idea of how this indicator works:
- If the price action is higher than the moving average line on the chart - this generally indicates an upward trend
- Should the price action be placed below the moving average line - the forex pair is likely experiencing a downward trend
When using moving average indicators yourself you will be able to view various time frames of a pair. For instance, popular charts cover 50 days, 100 days, and 200 days.
The best thing to do is use more than one type of technical analysis in your forex trading USA strategy.
Relative Strength Index
The relative strength index (RSI) is another way to gain an understanding of the market sentiment of a pair.
For instance, if the index illustrates that your chosen currency pair is heading into oversold or overbought territory - this gives you a fairly clear indication of which way the pair’s trend could be headed.
Let’s give you an example to clarify further:
- The RSI is showing you 84/100 on GBP/USD
- This is a clear indication that this pair is in the overbought camp
- A market correction is likely
- With this in mind, you place a sell order to catch the trend reversal
Now, a quick example of the same pair in the oversold category:
- The RSI indicates 21 on GBP/USD
- This illustrates that the pair is oversold
- Again, an FX pair cannot continue in the same direction indefinitely
- Therefore, a market correction is likely
- In this case, you would need to create a buy order to catch that reversal
Fibonacci Retracement Levels
This technical indicator draws between two significant price points - a notable high point, and a notable low point. Levels between these two points will then be created.
Fibonacci retracement levels are going to show you the support and resistance levels of your chosen forex pair.
In a nutshell:
- The ‘support level’ acts as a preventative measure, to stop the currency pair’s value from falling too far
- The ‘resistance level’ of the indicator stops the price of the FX pair from escalating any higher
When it comes to the short-term price lows and highs of your chosen forex pair - this indicator, when used alongside the others, is a crucial source of information!
Should the currency pair happen to break through the Fibonacci retracement levels - the pair in question will simply start a new upward or downward trend.
Section 3: Forex Trading USA - Popular Strategies
In this section of our forex trading USA guide, we think it’s a good time to talk some more about strategies.
We’ve already mentioned that extra orders such as stop-losses and take-profit can be a great addition to any trading strategy. Not to mention taking advantage of the plethora of trading tools and indicators available to you.
Balancing your risk and reward, expectations, and bankroll should also be an incredibly important part of your own strategy moving forward. This goes for each and every position you take in the market.
To give you the best possible start in your forex trading USA adventures, we have listed some of the tried and true strategies used by traders, over the world.
Most Popular Forex Trading Strategies in the US
1. Risk/Reward Management
As we touched on, risk/reward management should already be in your mind when thinking up a strategy. This is your own hard-earned capital at risk, so it is much less risky to have a plan in place.
One can fairly easily mitigate losses from a trade by ensuring that a stop-loss order is placed on every single trade. As we have explained, this indicates to your broker how much you are willing to lose on a trade before cutting your losses and closing the position.
Generally speaking, traders utilize a risk-reward-ratio. We tend to recommend sticking with a ratio of 1:3 - meaning you are willing to risk $1 for every $3 profit.
A good place to start when placing an order is to calculate 1% of your initial stake - and set up a stop-loss order at that value. This means, as we said, your broker prevents any further loss past that 1% point.
- You are placing a buy order on EUR/USD worth $1,000
- Using a risk/reward ratio of 1:3, your stop-loss order would be at $990
- This order prevents you from losing more than 1%
In terms of take-profit orders, let’s give you another example using the same 1:3 risk/reward strategy:
- Your buy order on EUR/USD is worth $1,000
- You do not want to make gains of less than 3% - as per a 1:3 risk/reward ratio
- Your take-profit order would be $1,030
- This order ensures that if you make 3%, the broker will close it for you
Once these particular orders have been created, you simply need to sit back and allow your broker to execute your trades as instructed - when the time is right.
2. Day Trading vs Swing Trading
We have mentioned day trading and swing trading briefly. However, they are also relevant when thinking about which strategies you might want to use.
Both day trading and swing trading are popular amongst USA forex traders, irrelevant of the level of experience.
Let’s take a closer look at the essence of both:
- Day trading is the process of opening and closing several trades within the same trading day - sometimes within minutes at a time. The idea being to make small gains from micro price fluctuations - regularly.
- Swing trading is the process of opening and closing various positions, but over days, or even weeks at once. The idea is to ride the trend of a pair - that is until it’s time to let go and cash in - whether that be days or weeks
Although both are great ways to trade forex in the USA, swing trading can be considered easier for newbies - as you have longer to conduct your own research based on the analysis.
This extra time can make the decision process easier for inexperienced traders.
3. Automated Trading USA
Forex trading USA doesn’t have to involve learning complex technical analysis, historical price charts, and knowing when to time the market.
There are tools and signals out there to help people who want to get started without learning the ins and outs. And also those who lack the time to keep abreast with the latest technical and fundamental analysis.
Forex Robots USA
Let’s start with forex robots. These days many traders opt to trade completely passively. This is done by utilizing automated trading robots. Otherwise, these are called forex robots, FX bots, or EAs (expert advisors).
These robots are designed to track the markets 24 hours a day, 7 days a week - looking for potentially profitable trading opportunities. It’s essentially downloadable software, based on algorithms and preprogrammed searches.
Forex robots don’t need 8 hours of sleep to function and they don’t need to worry about fear or greed getting in the way of trading decisions.
Sounds perfect right? We should say that this software doesn’t come for free - which in itself invites heaps of rip-off merchants in their droves.
If what these forex EA providers are offering seems too good to be true, in our experience it probably is. Not only that, but there is never any guarantee that the forex robot is going to make you any money.
With that in mind, we recommend thoroughly conducting your own research before signing up with any provider in this space. Some forex EA software is sold for hundreds of dollars, if not thousands - promising you’ll be as rich as Bill Gates by Christmas.
The truth is, there is no risk-free way to trade, not completely. Moreover, with forex EAs there is never any guarantee you can make a regular income.
If you are fairly sure that the company you are looking at is legit, it’s worth seeing whether they offer a 30-day money-back guarantee. This means that if you are unhappy with the trading bot within the 30 day period you will be entitled to a full refund.
Although do proceed with caution, we’ve seen cases where clients had to jump through hoops to prove the bot didn’t work for them. Sometimes, unless the provider is satisfied you have used the software as they recommend - they may refuse to refund you.
Let’s say however that you find a reputable forex trading robot provider, with great reviews, etc. The best way to utilize it is probably through the hugely popular trading platform MetaTrader4.
Simply download your EA software via the link sent to you. Next, upload that file onto MT4 and give permission for the trading bot to buy and sell on your behalf.
MT4 also has a plethora of highly informative educational content, technical indicators, present and historical price charts, and heaps of other useful features.
Forex Trading Signals
Now, onto a less passive form of forex trading in the USA - signals. In this case, either an automated system or a seasoned investor will send you trade suggestions.
Signal services differ, but forex trading signals tend to include the following insight:
- An indication of whether to buy or sell the currency pair
- A limit order suggestion
- A stop-loss suggestion
- And a take-profit suggestion
As you can see, forex trading signals take away the need for you to spend months or years learning charts and analysis back to front.
The automated or pro trader created signals are simply there to point you in the right direction. They scan the markets for opportunities so that you don’t have to worry about missing a beat.
When you receive the signal, to your mobile phone or email - you simply need to decide whether or not to act on it.
Much the same as with forex robots, and even brokers - tread with caution. Check out the credentials and reviews of the company before handing over any money.
Forex Copy Trading
When it comes to passive forex trading, this feature has to be up there with the best. For those unaware, this is another passive way of forex trading in the USA.
In layman's terms, this tool enables traders of all levels of experience to copy a pro forex trader, with a proven track record.
In other words, you can scour through a list of vetted traders to find one you want to copy. Each investor will have heaps of information to help you make a decision - such as which asset class they focus on, previous trading success or failures, and risk level.
These pro traders often have hundreds of other people copying and investing in them.
So how does it work? Well, let's assume you’ve found a trader who shares similar trading interests, in that the person is focussed mainly on forex and has a good track record of being in the green.
You can copy that person's entire portfolio like-for-like, or you can copy all future trades. Each and every time that trader buys or sells a pair, this will be mirrored in your own trading portfolio.
For example, should the pro trader invest 0.3% of their portfolio in GBP/USD - 0.3% of your own portfolio will reflect this automatically, in real-time.
It is worth copying several traders as opposed to just one. In diversifying your forex endeavours like this, you are also actively avoiding overexposure to one particular individual, thus softening your losses from trades gone wrong.
Section 4: Understanding Profit Margins, Forex Fees, and Leverage
By now you should have a pretty clear understanding when it comes to the great tapestry of forex trading in the USA.
Our aim is to take you through it thread by thread, all the while building your confidence in the market, and your knowledge of how it works.
We think the best way to clear the mist is by using clear examples, from the beginning of the process - right up to strategizing.
In section 4 of our ultimate beginner’s guide to trading forex USA - we are going to delve into leverage, profit margins and forex fees.
This will be followed by how to find the best broker to give you access to USA forex trading sphere.
Forex Broker Commissions and Fees
A key consideration for any forex trader should be - how much will it cost me in fees to trade here?
After all, you can have the best forex trading strategy ever - but if you’re trading via an expensive broker, you won’t see much in the way of profit at the end of it.
Trading platforms offer a financial service to thousands, if not millions of people every single day. Much like any business, this company needs to make some money, so don’t be afraid of commission and fees - just be mindful of them.
No two online brokers are exactly the same, and therefore each fee table will differ too. Some brokers offer forex services commission-free and make up for this via the spread of the pair (as we explained earlier).
On the other hand, other trading platforms charge commission as a percentage of the trade. For instance, your broker might stipulate that they want 0.3% of each trade.
Here is an example of how this 0.3% commission would affect your potential margins:
- Let’s imagine you have just created a $1,000 buy order with your broker
- As such, you are charged $3 in commission ($1,000 + 0.3%)
- 3 hours later, your trade is now worth $1,320
- You close the position with a sell order
- Your broker needs another 0.3% - which is $3.96
- Entering and exiting this trade cost you $6.96 in commission
Overnight Financing Fees
Overnight financing fees are another aspect of forex trading which can be called various different names. Let’s start by saying that you might also see this fee labelled as; rollover rates/fees, or swap-fees/interest.
They all mean the same thing. If you leave a position open past market hours, meaning for longer than one day - you will be charged a fee. It’s comparable to an interest rate charged by your broker for holding your trade open for you.
Fees can vary from broker to broker - always check the terms and conditions and fees before signing up.
Using Percentages to Calculate Profit and Loss
We think that using percentages rather than pips can make it much simpler to calculate your own losses or gains.
To demonstrate this theory, let's look at a couple of examples.
Going Long on a Forex Trade
Let’s show you a quick example of going long - and all should become clear:
- You have been quoted 1.1300 on EUR/USD
- In this scenario, you think the pair is undervalued
- You place a buy order of $1,000
- A mere 2 hours later EUR/USD is priced at 1.1550 - an increase of 2.21%
- Happy with your gains, you create a sell order with your broker
- From your stake of $1,000, you made gains of $22.10
- The calculation on this trade would be: $1,000(stake) x 2.21%(price increase) = $22.10(profit)
Going Short on a Forex Trade
Now, let's assume the opposite. This time, you think GBP/AUD is overvalued, leading you to go short:
- Your sell order stake is $1,000 on GBP/AUD
- This FX pair is valued at 1.8244
- A few days pass and the pair falls to 1.7600
- This shows a 3.52% decrease in value
- You speculated correctly - happy with your gains, you create buy order
- From your stake of $1,000 you made a profit of $35.20
- The calculation on this trade would be: $1,000(stake) x 3.52%(price decrease) = $35.20(profit)
As you can see, making a profit isn’t always that hard if you time the market correctly. However, you are not going to be able to quit your job with that kind of income. This brings us smoothly onto leverage - which is often used to amplify the profits of forex traders of all types.
Magnify Your Profits With Leverage
For those unaware, leverage is comparable to a forex trading loan from your broker of choice. Forex trading USA leverage is capped at a ratio of 1:50 on major pairs, and 1:20 on minors and exotics.
These limits are enforced by the NFA (National Futures Association) and US federal agency CFTC (Commodities & Futures Trading Commission).
Using leverage of 1:50 from your broker means that you can trade with 50 times more than you have. Put simply, if you have $100 to stake on a forex pair - applying 1:50 leverage amplifies that to $5,000.
If you are trading a minor or exotic pair, you can apply leverage of up to 20 times your stake. So $100 becomes $2,000.
Some offshore brokerage firms do offer much higher leverage, as much as 1:500 on some assets. Nevertheless, we wouldn’t recommend signing up with them as it is highly doubtful they are regulated by the CFTC, or otherwise.
That’s the basics of leverage. Now it’s time for further clarification - using an example of how leverage can affect your trades.
- Let’s say you are still trading EUR/USD from our recent example
- However, you added leverage of 1:50 to your position
- Your initial stake of $1,000 is now $50,000
- You made gains of 2.21% on that trade
- Rather than a $22.10 profit - you made $1,105
- The calculation on this leveraged trade would be: $50,000(stake) x 2.21%(price rise) = $1,105(profit)
If you had speculated incorrectly and lost the trade, you would be $1,105 in the red. So always remember that leverage should never be used lightly. Leverage is like a loan - it can magnify both profits and losses.
One last important note on leverage - when utilizing these ‘borrowed’ trading funds - you should always make use of the aforementioned stop-loss order on each and every trade. This is going to prevent you from losing more than you can afford.
Section 5: How to Find the Best Forex Trading Broker USA
As you’ve made it thus far in our ultimate beginner’s guide to forex trading USA, you are no doubt super enthusiastic to get started.
In order to join the millions of other Americans trading currencies day in, day out - you need a broker to give you access to the global exchanges and execute those all-important trade orders.
There are hundreds, if not thousands of trading platforms offering a service - some good and some damn right ugly.
To help you when it comes to sifting through the good, the bad, and the awful - we have compiled a list of important metrics to consider.
5 Factors to consider before choosing a forex trading broker in the US:
1. Is the Trading Platform Regulated?
When it comes to choosing a broker, we think it’s important to choose one that has been approved and licensed.
Regulatory bodies such as CFTC of the hold brokers accountable for general standards, customer due diligence, and financial conduct. This makes the USA forex trading space safer for all.
Not only that, but according to SEA Rule 15c3-3 (Securities Exchange Act) - brokers are obliged to submit regular audits.
CFTC approved brokers are also legally obliged to hold your funds in a separate account to their own company account. This protects you to a certain extent from bankruptcy and financial crime.
You should find that any online broker holding a license will proudly display the license number on the trading platform. Moreover, you can always check on the official CFTC website to make sure the brokerage firm is approved and licensed.
2. Are the Fees Affordable?
We have talked in detail about the various fees you might expect to pay when forex trading in the USA.
You will come across commission-free brokers and others which charge extortionate trading fees.
At the end of the day, it is up to you and your strategy/budget which trading platform you use, and what you consider to be too much.
All we can do is advise that forex trading in the USA can be done commission-free. You just need to conduct some research yourself.
Ideally, you want low commissions, tight spreads on forex pairs and access to the various markets.
Keep an eye out for inactivity fees too. Some brokers will charge after 6 months of not actively trading.
These fees also vary, but we find that this is usually from $10 to $50 per month after the inactivity time specified has passed.
3. Which FX Pairs are Available?
Whilst this might sound super obvious - there is no point in signing up to a broker based on low fees and a comprehensive platform if they cannot offer you the pairs you want to trade.
Not only should you be thinking about which currency pairs you want to trade, and whether they are available - but how much diversity the online broker can offer you.
After all, you might want to trade major pairs now, but have a flutter with minors and exotics later down the line.
As we touched on earlier, some online trading platforms don’t have access to exotic pair markets. Always shop around before putting all of your forex trading eggs in one basket!
4. What Deposit/Withdrawal Methods are Accepted
As we have said, each broker is different. If you simply must fund your account with a specific payment type, for example, debit card - always check that the broker will accept that.
In addition to checking which payment methods are available to you, it’s a good idea to make sure you won’t be charged transaction fees.
Although it must be said, not many trading platforms charge transaction fees. And those that do usually do so when paying via specific payment methods.
It is worth noting that by depositing into your chosen forex platform using bank transfer, you can usually expect to wait 2 or 3 days for it to reach your trading account.
5. Additional Factors to Consider
Aside from all of the important metrics we have listed here, there are a handful of other considerations when finding the best forex broker in the US.
- Is the broker website easy to use and navigate?
- Will I have access to forex based educational content?
- Does the platform have technical or fundamental analysis available?
- Is the trading platform MetaTrader4 compatible?
- Can I trade easily using my mobile?
- Will I be able to use a demo account?
Forex Trading USA: The Lowdown
You’ve made it this far in our guide, so we are sure you’re feeling confident enough to go forth and conquer the forex trading USA arena.
We have covered in detail currency pairs and how they are categorized. Not to mention how to place various broker orders, pips, spreads, leverage, and even tried and tested strategies.
Despite all of this information you have under your belt, don’t be afraid to start with a demo account or with small stake.
Forex trading isn’t an easy feat, so learning the market and how to read charts and perform coherent analysis can take a long time. If you are eager to get going, there are heaps of tools out there to give you a helping hand.
This includes forex trading signals, a fundamental analysis/news subscription service, and automated forex robots. Of course, then there is the phenomenal copy trader feature via MT4, enabling traders to copy a pro, like-for-like, by simply investing in them.
By choosing a fully regulated forex platform you are providing yourself with a safety net of sorts, protecting you from the shady characters in the online trading space.
What is forex trading USA?
Forex trading USA is trading one currency against another, via a pair. For instance, the Euro against the US dollar would be EUR/USD. You have to speculate on the rise or fall in value. The goal is to sell your position for more than you paid - thus making a profit
Can I trade forex in the USA?
Yes, you most certainly can. Heaps of US citizens trade currency pairs every single day. You simply need to find a broker and learn the market. Pick a pair to trade, decide on a stake, and create an order.
Which currency pair is the most popular to trade?
The most popular forex pair to trade, worldwide, is EUR/USD. This pair along with other major forex pairs comes with tight spreads and high trading volumes. Other popular pairs include USD/JPY, NZD/USD, and GBP/USD
Can I trade forex in the USA with no experience?
You can trade forex in the USA as a newbie but tread with caution. The best way to start is by using demo accounts. Furthermore, consider educating yourself on the forex market, including analysis and risk management.
How will I know if my broker is regulated?
A regulated broker will usually make it very clear on their trading platform, so you should see a license number. You should also see a list of one or more regulatory bodies. Well respected regulators include the CFTC of the USA, FCA of the UK, and ASIC of Australia. However, there are more trusted bodies.