Forex Brokers

Although my EA's work with US brokers, they work best with non-US brokers that allow hedging, and that have higher leverage.

Unfortunately the US has made it harder and harder for US citizens to get Forex accounts with non-US brokers.

In fact, to avoid all the expense and paperwork of allowing US citizens to open accounts with them most overseas brokers have simply banned any new US clients from opening an account with them. They did this by simply removing "United States" from the "Country" tab when you go to fill out a application.

There are advantages to using my EA's on non-US broker platforms where the leverage is higher, and the EA can open both buy and sell orders on the same currency pair.  

HotForex no longer acepts US clients, and is closing all US client acocunts, and returning their money. Apparently the US recently (April 2012) notified them in paper that they cannot accept US clients any longer.

FinFX is a non-US broker who accepts US clients (at the time of writing this). They have micro accounts available (allows 10 cens a pip lot size), as well as ECN accounts. But the ECN accounts need to be funded with a minimum of $2500, and the minimum lot size in ECN accounts is $1 a pip wich can be risky when using the optional Martingale strategy in some of my EA's if you accoutn balance is under $5000.

If you signup with  FinFX you might want to get a VPS that is in the Europe area such as NextPointHost (click on Forex VPS when you arrive at their website).

If you are a US citizen and you choose a non-US broker you are responsible for reporting the sum of your Forex gain or loss to the IRS (please see simplified tax info below).   

To be accepted by a Forex broker you need to fill out an online application and send them a photo copy of your id + utility bill or proof of current address (but this may vary from broker to broker).

Once your application for a live account is accepted you can fund your account. But it is best to first practice on a demo account that is supplied with virtual funds for you to practice with.

The method of depositing and withdrawing funds to and from your broker account varies from broker to broker. The methods often used are: Wire Transfer, Check (in the mail), e-check, credit card, Paypal.....and various other payment methods. But not all Forex brokers use Paypal, and might only use wire transfer and check. If you are thinking about signing up with a particular broker it is best to research them first.

Simplified Forex Tax Info

Reporting Forex Gain/Loss info on your 1040 Tax Form if you live in the US , but Trade with a Non-US Broker.

This is only an example about how to record your Forex Gain/Loss on your 1040 Tax Form.

PLEASE CONSULT A TAX PROFESSIONAL. Tax rules often change. 

If you have a US Broker they will send you the forms and info you need.

If you live in the US, but have an account with a non-US Forex broker, you are responsible for reporting your Forex Gain/Loss on your 1040 Tax Form.

You need to report your total Forex gain or loss on Line 21 of your 1040 Income Tax return where it says "Other income".

On that line you need to write: Ordinary gain/loss from IRC 988 cash forex transactions.

If you have a overall loss for the year in Forex then put the amount in a negative value, such as -$5000.

That amount will be subtracted from your gross income that was reported from your W2 form from your employer if you have a job, and/or from your business gross income if you own a business.

If you come out ahead and have a yearly gain in Forex, instead of a loss, then add your Forex yearly gain (such as $10,000).

That will then be added to your gross income, and taxed.

Again, please CONSULT A TAX PROFESSIONAL. Reporting your Forex gain or loss may not be as complicated as you may think.

Types Of Forex Brokers

ECN Forex Brokers (#1 choice)

ECN Brokers simply provides the best possible price i.e. the best spread based on current market participants. The price on their platform comes straight from the InterBank market and there is no manipulation of the spreads. Spreads as you know are the bread and butter of market maker brokers. Since there is no mark-up on spreads by ECN brokers, the only way they can receive money is to charge commissions fees. Paying commission works out more economical than the higher spreads on market maker platform. (Copied from firepips.com)  

While you may find a few brokers that are ECN, there are even fewer that offer a ECN version of MT4.

FinFXis a non-US ECN broker who accepts US clients.

MB Trading (US broker) offers a ECN version of MT4. 50:1 leverage.

STP Forex Brokers (#2 Choice) 

Some brokers claim that they are true ECN brokers, but in reality, they merely have a Straight Through Processing system.

Forex brokers that have an STP system route the orders of their clients directly to their liquidity providers who have access to the interbank market. NDD STP brokers usually have many liquidity providers, with each provider quoting its own bid and ask price.

Let's say your NDD STP broker has three different liquidity providers. In their system, they will see three different pairs of bid and ask quotes.

Their system then sorts these bid and ask quotes from best to worst. In this case, the best price in the bid side is 1.3000 (you want to sell high) and the best price on the ask side is 1.3001 (you want to buy low). The bid/ask is now 1.3000/1.3001.

Will this be the quote that you will see on your platform?

Of course not!

Your broker isn't running a charity! Your broker didn't go through all that trouble of sorting through those quotes for free!

To compensate them for their trouble, your broker adds a small, usually fixed, markup. If their policy is to add a 1-pip mark-up, the quote you will see on your platform would be 1.2999/1.3002. You will see a 3-pip spread. The 1-pip spread turns into a 3-pip spread for you.

So when you decide to buy 100,000 units of EUR/USD at 1.3002, your order is sent through your broker and then routed to either Liquidity Provider A or B.

If your order is acknowledged, Liquidity Provider A or B will have a short position of 100,000 units of EUR/USD 1.3001, and you will have a long position of 100,000 units of EUR/USD at 1.3002. Your broker will earn 1 pip in revenue.

This changing bid/ask quote is also the reason why most STP type brokers have variable spreads. If the spreads of their liquidity providers widen, they have no choice but to widen their spreads too. While some STP brokers do offer fixed spreads, most have VARIABLE spreads. (Copied from babypips.com)

HotForex is an example of a Forex broker that uses STP in their MT4 platform.

Market Maker (Dealing Desk) Forex Brokers (#3 Choice)

As the name suggest they “make” the price, as in change Bid and Ask value. Say for example they receive 1 pip spread from InterBank Market on EURUSD, but instead for us they display 3 pips spread (spread is the difference between Bid and Ask). Brokers can vary this from time to time and sometimes even show tighter spreads on Demo accounts but when you open live account it is a totally different story.

Every time you open and close a trade you lose the spread. This adds up to a significant value if you trade frequently. Not only this but market maker brokers are notorious for creating spikes, they do it in order to take out customer’s stops. Some market maker brokers also freeze their platform during news announcements or increase spreads by 20-30 pips which is quite common. Since Forex is not tightly regulated as other markets there is not much NFA or similar organizations can do.

The only advantage of using a market maker broker is that they require less funds to open account and usually offer platforms that are easy to use. They also offer higher leverage, benefits of which are debatable.  (Copied from firepips.com)  

For a list of brokers Click Here.

For more information about different types of brokers Click Here.