Forex Trading New Rules Same Game

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Sam Evans

28 Oct, 2010

in Forex and 1 more

It is the job of every serious-minded Forex trader out there to keep abreast of the latest news and events, which could potentially have an effect on their day-to-day trading activities. This month is a big month for the world of Forex trading in that we have seen brand new legislation enforced which will no doubt ripple across the activities of all Forex traders participating or looking to participate in the markets over the course of the future. This ruling has been met with praise by some and scorn with others, yet needless to say, it is here to stay and we should all be aware of its appearance moving forward. The ruling I am talking about is the introduction of the latest Commodity Futures Trading Commission (CFTC) Compliance rule, which will substantially reduce the amount of leverage available to retail Forex traders.

The ruling came into effect on October 18, 2010, and in simple terms, dictates that all retail Forex traders will be required to maintain a minimum 2% initial and maintenance margin requirement for the major currencies, and 5% for all other currencies. As with most forms of legislation, these margin minimums are subject to change. The new regulation is intended to protect retail Forex investors in the US by preventing excessive use of leverage, a typically common reason for many account blowouts and horror stories. Up until this ruling, Forex traders have been used to working with a 1% margin requirement, and when considering the size of a $100,000 standard lot, this equates to a leverage ratio of around 100:1. Come the October 18th, we will all have to get used to working with 50:1 leverage on the major currencies. According to the majority of broker dealers I have looked at, the "major" currencies will include the popular pairings of the following: Euro, British Pound, Swiss Franc, Canadian Dollar, Australian Dollar, New Zealand Dollar, Japanese Yen and of course, the US Dollar. For example, if you were looking to trade any of the currencies against the US Dollar, you would now be looking to get 50:1 leverage on these trades, be they via standard, mini or micro lot sizing of $100,000, $10,000 and $1,000 positions, respectively.

In the case of the cross pairs, which we would describe as any Forex pairing which does not include the US Dollar, traders are now required to hold a 5% margin guarantee, giving them 20:1 leverage ratio. While this is much greater than the majors, considering the potential volatility that the likes of GBPJPY, AUDCHF and EURCHF can show, the CFTC believes that this is a far more responsible ground for traders to stand upon and hopes that these rules will help to protect trading accounts across the board. Let's take a look at some examples in monetary terms of how this new legislation will come into play when taking a Forex position on one of the majors, like EURUSD:

PRE–OCTOBER 18, 2010

  • Imagine we were working with a $10,000 trading account. The actual purchasing power would be in the sum of $1,000,000, which equates to available leverage of 100:1.
  • To take a trade with 1 Standard $100,000 lot, the margin would be set at around $1,000 to take the physical position (depending on broker).
  • To take the trade with 1 Mini $10,000 lot, the margin would be set to around $100 to take the physical position (depending on broker).

POST–OCTOBER 18, 2010

  • Imagine we were working with a $10,000 trading account. The actual purchasing power would be in the sum of $500,000, which equates to available leverage of 50:1.
  • To take a trade with 1 Standard $100,000 lot, the margin would be set at around $2,000 to take the physical position (depending on broker).
  • To take the trade with 1 Mini $10,000 lot, the margin would be set at around $200 to take the physical position (depending on broker).

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Re: Forex Trading New Rules Same Game

There's a different problem with the leverage restrictions. It exposes a careful trader to additional risk that the broker will go bankrupt or otherwise breach its contract. Suppose you have $100K available for trading and you are willing to risk 2% per trade or 5% at any one time. At 100:1 leverage that means you could, with a reasonable cushion, put $15-20K into your brokerage account and trade with the idea that a deep drawdown might require refunding. The rest of your available trading assets could go someplace safer, perhaps someplace Federally insured. With 50:1, you need to deposit twice as much money with your broker. How does this protect the careful trader, who actually thinks about all the various risks that face his capital?

Dec 18, 2010

Newbie (1 post)

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