Forex trading is an advanced style of investing that involves buying and selling different currencies from around the world.
The forex market exploded following the Bretton Woods Agreement Act of 1971. Over $4 trillion is traded on the forex market each day and unlike the stock market, trades can be made 24 hours a day.
The forex market lacks the volatility of stocks and it takes a rare event to see a currency move more than a penny or two in a single day (think the British pound sterling following the Brexit vote in 2016).
Low volatility combined with high liquidity sounds like a good investment, right? If you’re a clever trader, you can make a lot of money in a short period of time trading on the forex market.
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What Forex Margin Requirements Mean to Traders
Choosing the best forex broker is critical to trading currencies. You need two currencies to trade and you can find upward of 80 different pairs with some brokers.
However, some are traded more frequently than others, and the hierarchy is often referred to as the Big Seven. The seven most-often traded currency pairs are:
- EUR/USD (Euros to U.S. dollars)
- USD/JPY (Dollars to yen)
- GBP/USD (British pounds to dollars)
- USD/CHF (Dollars to Swiss francs)
- USD/CAD (U.S. dollars to Canadian dollars)
- AUS/USD (Australian dollar to U.S. dollar)
- NZD/USD (New Zealand dollar to U.S. dollar)
Since currency moves tend to be very small on a day-to-day basis, forex traders ramp up the leverage to turn these small moves into big gains. Leverage and margin are different terms, but both involve the same concept.
Leverage refers to building a position bigger than the capital you currently possess and margin means how much capital you must keep in your account to hold the position.
Leverage is expressed as a ratio, like 50:1 or 200:1. If a broker offers leverage of 200:1, that means you can buy $200 worth of currency for every $1 you have in your brokerage account. The international forex market is lightly regulated and it’s not rare to find leverage options at 200:1 or higher.
But thanks to Dodd-Frank legislation, United States forex traders are limited to 50:1 leverage ratios. A 50:1 ratio still far surpasses anything you’d get in the stock market, but it underscores the craziness that occurs in currency trades.
You can lose huge amounts if you don’t know what you’re doing, so don’t dive into currency trading without doing your research. Most brokers offer American forex traders leverage of 50:1 on “major” pairs and 20:1 on “exotic” pairs.
In addition to the ones listed above, a few other types of currencies are considered “major”: Swedish krona (SEK), Danish krone (DKK), and Norwegian krone (NOK). To get the 50:1 leverage ratio in the United States, both currencies must be considered major.
What to Look for in a Forex Margin Account
In the United States, forex margin requirements will be fairly standard, so you’ll need to weigh multiple options when considering a broker.
Commissions and fees are important aspects to consider, but you’ll also want a broker with low account minimums and a high number of tradable pairs. The best forex brokers will have the following characteristics:
- High leverage ratios
- Low commissions and spreads
- Low account minimums
- User-friendly trading software
- A high number of tradable currency pairs
Not all forex brokers are created equal and just because a broker has the best margin requirements, that doesn’t mean it’s the best fit for every forex trader. Make sure you pick a broker that fits your trading style and experience level.
Our Top Picks
Here’s a ranking of the six best forex brokerages and the margin requirements for each. If you’re thinking about getting into currency trading, you’ll need to open an account first.
Keep in mind that United States law prohibits brokers from offering American clients more than 50:1 leverage for major pairs and 20:1 for secondary pairs. In margin requirement percentages, that’s 2% and 5%, respectively.
FOREX.com is a subsidiary of Gain Capital and it’s one of the premier places to trade currencies in the world. FOREX.com offers comprehensive research and education materials on its platforms for novice currency traders. For forex veterans, the brokerage has a terrific platform and a wide variety of currency pairs, all with reasonable margin requirements.
FOREX.com offers several pairs at the lowest margin rate of two percent, including EUR/USD, USD/CAD and EUR/CAD. Other major pairs like USD/JPY, GBP/USD, and AUD/USD have a margin rate of either 3 or 4%. FOREX.com has two different account types.
Standard accounts are commission-free and the only trading costs accrued are the spreads. In a commission account, you’ll get access to much better spreads but it costs $5 per 100,000 contracts.
FOREX.com is one of the best currency trading vehicles in the game and has features beneficial for both new players and seasoned forex traders.
2. Interactive Brokers
Interactive Brokers prides itself on being a low-cost brokerage with international access. When it comes to forex trading, IB offers some of the most competitive commissions in the industry while maintaining the 50:1 and 20:1 leverage rates for major and exotic currencies, respectively. The commission schedule is listed below:
Using this table, a forex trade of 100,000 EUR/USD contracts would cost $2 total in commission. Forex traders with large accounts get even further discounted commission rates. Interactive Brokers has an entire platform dedicated to forex trading (cleverly named FX Trader) and supports 23 different currencies. You’ll get margin rates of 2% (50:1 leverage) on USD, CAD, EUR, and DKK and 3% (33:1 leverage) on AUD, CHF, NOK, NZD, SEK. If you don’t have permission to open a cash forex account, these margin rates could be higher. Forex account holders can trade 24 hours a day, from early Monday morning into Friday night. Read our Interactive Brokers review
3. TD Ameritrade
TD Ameritrade is one of the premier investing platforms on the planet with access to more research and analysis sources than any other broker. While these services do often result in higher commissions (TD Ameritrade still charges $6.95 per trade on stocks), there’s a lot of bells and whistles to enjoy on the platform, especially if you use thinkorswim.
TD Ameritrade has over 70 different pairing combinations and all can be traded on the thinkorswim platform, which might provide the best forex tracking and analysis tools on the market.
You’ll be able to track six different currency pairs all from the same screen and hundreds of different indicators are available to mark the charts. Thinkorswim separates currencies from bonds and equities into different, easily-accessible tabs, each complete buildable watchlist ability.
If you choose the commission-based account for forex trading, TD Ameritrade will charge 10 cents per every 1,000 units. If you wanted to trade 300,000 units of USD/CAD, it would cost $3 and you’d need to have $6,000 in your account to meet the 2% margin requirement.
Like Forex.com, TD Ameritrade does offer commission-free forex trading, but the spreads are much higher.
OANDA is a great forex broker for budget-focused traders. The company requires no account minimums to begin and there’s no minimum size that must be reached to execute trades.
OANDA is also involved with six different regulatory groups from around the world, giving customers an added sense of security. You’ll be able to trade 71 different currency pairs, but only five pairs can be margined at 2% (50:1 leverage).
Margin requirements of 3% or more exist on all pairs involving the yen, Australian dollar and Swiss franc.
Like most of the brokers on this list, OANDA offers forex traders two options: commission-based trades or spread-only trades. Commissions are $5 per 100,000 units, which is identical to FOREX.com but more expensive than TD Ameritrade.
Spread-only traders can benefit from OANDA’s price transparency engine, which uses proprietary technology to make sure spreads closely match those on the global market. OANDA has several different platforms for trading and also supports MetaTrader 4.
5. Ally Invest
Ally Invest is one of the top discount brokerages available for stocks, but Ally also has a healthy business in the forex market. Ally Invest Forex has several great platforms for traders, including the popular Metatrader.
Like all United States forex brokers, Ally Invest Forex caps margin rates at 2% and only offers 50:1 leverage on three currency pairs: EUR/CAD, EUR/USD, and USD/CAD.
Better margin rates are available at other brokers if you’d like to trade Danish krones or Japanese yen, so consider your options if these currencies interest you.
Unlike other brokers on this list, Ally Invest Forex is a spread-only forex broker. No commission will be collected on any currency trade and the only fee is the cost of the spread.
Commission-free forex trading is especially appealing to high volume currency traders who might be accustomed to large per-unit commissions.
Forex markets can be an exciting next step for experienced day traders, but they aren’t something the inexperienced or ill-advised should play around with. In addition to understanding charts and indicators, forex trading also requires a strong grasp of macro events in the global political and economic spheres.
Currencies don’t have earnings reports or business documents to study, so stock trading skills might not translate in the forex market. Be sure you have a firm understanding of what forex trading entails before opening a trading account.