An offshore forex account is simply a forex account that is opened at an offshore forex broker for the purpose of trading in online forex.

Such a forex account is described as offshore because the broker, thus the account, is located in a jurisdiction that is outside of the account holder’s home country and usually on an island far away.

The location is critical because the offshore broker must be established in a country where there are looser regulations and fewer constraints, so making it easier to trade forex. This type of offshore brokers work with clients from all over the world. They possess the essential knowledge and experience regarding taxation, economic and political factors that may considerably affect the trading process.

Offshore forex brokers are able to offer lower spreads and higher leverage.

Trading forex through an offshore forex broker comes with many advantages. Lower spreads and high leverage are two most important of those. Additionally, traders would be able to enjoy the benefits of bonuses and promotions that are offered by the offshore forex brokers.

Everything has started with the Great Financial Crisis (GFC). If you have watched the documentary Inside Job or the movie Big Short, you already got the idea. Brokerage firms have invented complicated investment products for the purpose of further profit and market diversification.

Those products were presented to the clients with the pledge of high returns. Due to their obscure nature, the clients were not able to understand the risk that they undertook through acquiring those derivative products.

After major financial institutions, such as Lehman Brothers, Merrill Lynch and AIG, went out of business at the financial crisis in 2008 – 2009, US regulators took serious measures and brought tighter rules and regulations for the financial sector. Leveraged investing, thus forex trading, suffered the most from the new stricter financial rules since it was the main culprit for the turmoil.

US regulators lowered the maximum leverage to 50:1 in the aftermaths of Great Financial Crisis in 2009.

Maximum leverage for forex trading was lowered down to 50:1 and acquiring brokerage license from NFA and CFTC was set to 20 million USD which makes it way more expensive for forex brokers to operate in the US compared to other jurisdiction. For the sake of comparison, note that Forex brokers in the UK must hold a minimum capital of 1 million GBP in order to provide forex brokerage services, while the requirement is 1 million EUR in Cyprus and 1 million AUD in Australia.

Due to low leverage and high capital requirements, profit prospects of forex brokerage are not that attractive in the US. Thus, there are only a handful of brokers located in the US that provides forex trading services to the US traders and higher operational cost leads those brokers to pass higher fees on the traders.

High Leverage: In the aftermath of the Great Financial Crisis of 2009, US regulator CFTC decided to lower the maximum leverage to 50:1 for retail forex transactions. On the other hand, offshore forex brokers carry their operations in the overseas countries where there are usually lighter regulations and restrictions. Therefore, offshore forex brokers can offer leverage from 100:1 to 2000:1.

Bonuses and Promotions: Offshore forex brokers are capable of offering compelling bonuses and promotions that US forex clients would not be able to otherwise receive from US forex brokers. This is because offshore forex brokers are taxed less than US forex brokers and thus they can share some portion of tax savings with the traders. The bonuses and promotions usually come in the form of free deposit bonuses, free trading VPS and free analysis tools.

Less Paperwork: Offshore forex brokers can open a trading account within a few hours for US clients while it may take up to several days to open a forex trading account with a US forex broker. The less bureaucracy expedites the entire trading operation including registration, funding and money withdrawals.

Automated Trading: Offshore forex brokers support automated trading whereas US forex brokers are hesitant on this matter. Automated trading is the use of computer programs (Expert Advisors) for executing trades. Expert advisors enter and exit trades with respect to the predetermined set of rules and preferences. Traders can connect these systems to the trading platform and automatize the whole trading process. Automated trading has several benefits such as minimizing the role of emotions for trading decisions, preserving discipline and improved order execution speed.

No Hedging Restrictions: According to NFA regulations, US forex brokers have to follow FIFO rule that restrains traders from hedging. In times of unexpected volatility, some forex traders prefer hedging their trades by opening a trade in the opposite direction on the same currency pair. However, NFA’s FIFO rule prohibits traders to open simultaneous trades on the same currency pair which means that traders have to close the first trade in order to be able to open a new trade on the same pair. This rule is not implemented by the offshore forex brokers.