Brokers for U.S. residents

My understanding about brokers for U.S. residents, is that they need to be regulated, and that there may be legal issues using brokers outside of U.S. or brokers not regulated by U.S. regulatory authorities.

What are the legal ramifications of using non-regulated brokers?

Also, any other pitfalls? For example, can you lose more money than what is in your account?

It sounds good to not have to abide by FIFO, and have 500:1 leverage, but I'm not clear on what the legal issue, if any are, and what else might be involved.

Anyone have any experience with this?

If you have a time the best you can do is read thread on babypips Going offshore to escape the CFTC

Better not to go aganist your goverment rules cash bussiness is a risky one and they are protecting u

I totally agree, which is the very reason I stick with U.S. regulated broker up until now. But when I saw someone else venturing offshore, it made me curious, and I wondered if I missed something.

So, more of a curiosity type of question, with the slight hope that I missed some key component in my research. But when I did the research months ago, it was very clear to me that U.S. regulated broker was the way to go, in spite of the "limitations"...

The regulations in the US do not protect us. Our funds are not separate from company funds. If broker goes bust, you lose your money. There are many unregulated brokers offshore who will accept US citizens. The way I look at it, if my money is not protected in the US, there is no more risk trading offshore. Actually, the way I view it, it's less risky. To trade a standard (100K) lot in the US, requires 2,000 in margin, the same trade with my unregulated offshore broker requires $200. The other $1800 remains in MY FDIC INSURED PERSONAL BANK ACCOUNT. Trading with this leverage also allows compounding of winners at a much quicker pace. I still only risk 2-3% per trade, only difference is my profits are much greater. Send me a PM and I'll explain in more detail.

I agree with Profit Daily that if a US regulated forex broker goes bankrupt that the retail clients will almost certainly lose their account balances because they are considered unsecured creditors. This is exactly what happened to clients of MF Global.

However, I respectfully disagree with the rest of the post. You can't have 500:1 margin the way he describes and only risk 2-3% per trade. Here is why:

If you are leveraged 500:1 on a EURUSD trade which trades around 1.24 right now that means that a price move of 1/500th the price against you will wipe out your account. That means a move of 25 pips will wipe out your account. If you claim to risk only 3% of your account, that means your stop loss is set at 3% of that 25 pips, which is 0.7 pips. For most retail traders, that is pretty much the trading spread, so your stop loss would trigger as soon as you enter the trade. What's more, it is common for a stop loss to be executed at a worse price than the actual stop. So you are sure to be risking more than 3% per trade.

Further, forex prices gap regularly, upon news events, over the weekend, and sometimes just at random times outside of that. Unless you are very careful with your trading, it is quite likely that at 500:1 you are actually putting far more than 3% of your account at risk due to these gaps, and in some cases you are actually putting your entire account balance at risk.

The US regulations to limit leverage to 50:1 is to protect novice traders from taking more risk than they realize, and I think it is a very sound practice. If you think you need more than 50:1 leverage, than you need to rethink your risk management plan.

And I have not even begun to discuss how much 500:1 leverage increases your transactions costs, but that is for another post.

Best regards,
Ian

Very good posts on this topic. Thanks to all for the input.

I went ahead an opened a demo account with a broker, trading with 500:1 leverage. I more than doubled my account in a single day, with just a few trades.

Granted, demo is not the same as real trading. I know that for a fact, since I've tried demo, and quickly realized how much better it is to trade with live account, since sooner or later, on demo, I'd just flub it, because, hey, it's not real money.

However, 500:1 leverage is not so scary when you can open up positions in both directions if uncertainty enters the picture when you're in a trade. So, if it was only the high leverage alone, I'd agree with the "too much risk" opinion. But since I could open up an opposing position until I was sure about the price direction, it worked out extremely well.

Of course, like what has already been said, you have to know what you're doing. I'm still considering it and will keep testing the demo just to get comfortable with how it works.

The other thing I'd be concerned with would be data connection reliability. With a broker overseas, I can't imagine the data connection being as reliable as one local. In fact I did experience some "disconnect" time. This would be a concern for me. I'll keep testing it. But if anyone else can vouch for data connection quality with their offshore broker, I'd like to hear about that too.

Thanks for posting!

I appreciate your imput, although you completely misunderstood what I was saying, I only use the leverage to require less money with the broker. I am risking 2-3% of my forex account WHICH REMAINS IN MY BANK ACCOUNT UNTIL NEEDED. So if I have a $2,000 account and risk 2%, it is $40, if I use a 40 pip stop, I trade $1 pip. To trade $1 /pip, I need $200 in margin in a US account, I only need 20 in margin to open that position with 500:1, of course in this example it would be $40 if using a 40 pip stop. the point I'm making is my balance is safer in MY BANK than ANY broker.

Leverage is an opportunity in business. When you loose/win 1 pip, it's loose/win 1 pip anyway. You can't blame leverage, you blame yourself.
I've ever seem leverage wiped out the account. It's you !!

Here is some reasons to wiped out your account:
- Bad trades.
- Lack of education, experiences in trading job
- ... and this is a most -> OVERTRADE.

Over trade is the most of reasons to wiped out account pretty good. Supposed $10 is 2% risk of capital, but i need stop loss 100 pips. So, the maximum value per pip i can trade is 10 cents per pip, no more than that.

I see what you are saying there now. Yes, I agree this is a novel and useful way to make use of high leverage. The money is certainly safer in your account than in the brokerage account. Especially if you earn more interest in your bank account. Or better yet, have it offset some debt interest on your mortgage if you can pull it back out with a line of credit if only needed infrequently.