Trading Forex in Offshore Accounts

Retail traders enjoy the Forex market as it is easy to access the trading account online. Now with Internet access almost everywhere in the capitalist economies, trading has become more and more popular. Globalisation is the name of the game in the the 21st century. China is the world’s manufacturer, the USA is the innovator, the European Union formed to compete with the two and with Russia… The same way one looks at the global economy can be used to look at trading the Forex markets. When choosing a Forex broker to trade with, one is not limited to the boundaries of one’s country or region, but because of the Internet era we’re living in can choose a broker from another part of the world. The criteria used to analyse the broker are the same, but some other jurisdictions may offer more advantages for the retail trader. If the broker is regulated and conditions for trading are met (segregated funds, funds safety, regulation, etc.), then Forex trading is not bound to any one physical location such as a country or a region. With the above said, the idea of this article is to discuss the advantages and disadvantages of trading Forex in offshore accounts. This means, opening a trading account in a different jurisdiction (country, continent, etc.), and trading it. What are the problems faced, if any, and why should one go down that path? The following are pros and cons of trading on an overseas account.

Pros and Cons of Trading in an Offshore (Overseas) Account

What would make someone open a trading account in a different country or region? These days there are plenty of Forex brokers available in any country, so why bother to open a trading account somewhere else?

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Advantages of an Overseas Account

The answer to the two questions above is that some other jurisdictions may offer specific incentives that are not available in all regions. The classical example here comes from the United States. In the United States, the Security and Exchange Commission (SEC) forbids Forex brokers to allow their clients to hedge positions on the same account. As a short introduction, hedging means opening two trades on the same currency pair and with the same volume, but in opposite directions. The idea or the argument the SEC brings to justify its decision comes from the fact that hedged positions are supposed to have a higher degree of risk. It thus seems that everything is being done on behalf of the client to protect client’s interests. So far, so good. The problem, though, is that there are wonderful hedging strategies that work like a charm, but US-based traders cannot use them if the trading account is with a broker in the United States. To give you an example, imagine you have a trading strategy based on a technical set-up (such as trading an intersection point or a cross between two oscillators) and you apply it on the same currency pair, but on different timeframes. Such timeframes can be the daily, 4-hour, hourly and 15-minute charts; or maybe even the 5-minute chart, to make things more interesting still. Because the timeframes are spread so widely, it is possible at any one moment in time to have a bullish signal on one timeframe and a bearish signal on another one. If you’re not allowed to hedge on your trading account, then you can’t take all those signals, and may miss out on some good profits. One way to avoid that is to open two distinct accounts with two different brokers, but this is time-consuming as well as resource wasting. Another way to avoid this is to open an offshore account: That is, a trading account with a broker that is not based in the United States, but is still regulated.

Any profit made in an overseas account is not taxed unless the funds are withdrawn. If they are kept in the trading account, there is nothing to worry about. Still, on the same page, trading in offshore accounts opens up the opportunity to have your trading account denominated in a different currency. For example, if your analysis on the medium- to long term shows that the Australian dollar is going to appreciate against the US dollar, then it would be wise to trade with an Australian dollar-denominated account. The next thing to do is to search for brokers that offer the possibility of opening a trading account in this currency, and open an account. In this way, there is a win-win situation in the event that the market confirms your analysis and the AUD/USD pair moves higher. On the one hand, you’ll make a profit by being right on the trade, and on the other hand, you’ll profit from the fact that the Australian dollar appreciated against the US dollar. This is just a small trick to profit from favourable conditions that are available in a different part of the world.

Another constraint in the United States is that trades need to respect the First in First out (FIFO) rule. This rule calls for the first trade that was open to being closed before any other trade can be made on the same currency pair. While this should not have a significant impact on the overall performance, it does affect the trader on a psychological level. Closing a trade that is in negative territory just to release some margin can be avoided by closing a positive trade opened later from a better level. This is not possible to do if it is mandatory for the account  to follow the FIFO rule. These things mentioned here are only a few that show the importance of having an open mind when choosing the broker to trade with.

Disadvantages of an Offshore Account

By far the main disadvantage of an offshore account is that there is a big risk that the broker is not regulated; whereas in the United States, for example, you can be sure that all brokers are regulated. This makes traders spend time and resources trying to find out about the brokerage business they want to open an account with, etc. The funny thing is that regulation is a positive thing both for the broker and trader, but unfortunately, it is not always understood the right way. Again, to avoid the constraints mentioned in this article, opening two or more trading accounts (even with the same broker) is recommended. While funds are split, and therefore the available trading margin is split as well, it is better than not using hedging, or being forced to follow the FIFO rule even when it doesn’t make sense for your overall strategy.


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