I detect a whiff of panic…
All these emails I’ve been receiving about the new ESMA regulations.
Honestly, you’d think the world was coming to an end or something.
And I don’t mean emails I’ve been receiving from TN readers – most of those have been very sensible and enquiring – I mean emails I’ve been getting from service providers in the trading industry: brokers and the like.
Anyway, you’re probably sick to the back teeth of hearing about ESMA yourself by now, but I thought I’d better share my thoughts with you.
Especially since I think there’s absolutely nothing to worry about.
At least, not if you manage your risk and size your positions in the conservative ways I prescribe in programs such as Plugin Trader, FX Breakthrough Academy, and FX Flow Trader.
Arrrgh! ESMA is coming. But what does it mean for me?
So, here’s the deal…
At the end of July some new regulations come into force.
They come courtesy of our meddling friends at the European Securities and Markets Authority (ESMA).
They’re clamping down on a range of things. One of them being the way Binary Options are marketed and promoted – and it’s about time that particular swamp was drained as far as I’m concerned! But what is of more relevance to us Forex traders is the new restrictions on margin allowance.
Until the new regulations came in most brokers and spread betting firms offered Forex markets at 200:1 leverage.
It meant you could control £100 worth of assets as long as you could satisfy a tiny ‘goodwill’ deposit of just 50p while your trade was open.
To put this into context: a 50p per pip spread bet trade on EURUSD at current market price of 1.1759 would have an asset value of £5,879.50. (11,759 pips multiplied by 50p = £5,879.50)
And at 200:1 leverage you only need to stump up the money to cover 0.5% of that value i.e. the margin requirement for that trade is just £29.40.
Now that’s a beautiful thing. It means you have an enormous amount of flexibility in your trading. You can open huge positions and trade like a big-shot relative to your account size
But… you can see where the problem lies…
Big leverage CAN mean big results. But it’s a double-edged sword. It can ALSO mean a disaster of epic proportions when things don’t quite go according to plan.
So picture the scene…
An inexperienced trader hits the markets with a gambler’s mindset.
He’s throwing-out £5 per pip trades off the back of his £500 account with scant regard for position size or risk per trade relative to his account size.
He gets caught the wrong side of a fast 130 pip move against him and *poof* there goes his account in one fell swoop.
Not only has he totally blown-out his account, but he actually owes the broker more money than he had in his account in first place!
Cue the inevitable blame-shifting, cries of unfairness, complaints to the Financial Conduct Authority etc.
So as Quentin wisely commented in the FX Flow Facebook Forum this morning:
“If you are only risking 2% to 3% of your bank on any trade and dont open more than roughly 8 trades at once you will be fine. The new rules are to get the gamblers, people whom have a £100 bank and trade at £5 a pip.”
The new maximum margin will be 30:1 leverage. It means you’ll need to cover 3.33% of the value of your position. So that 50p per pip trade we looked at a minute ago will now attract a margin requirement of £195.
Sure, it’s a bit of a poke in the eye for the gung-ho gambler. But for us responsible, risk-aware, traders, it’s just business as usual.
But let’s allow the dust to settle as the new regs come in at the end of July and we’ll see how things stand.
The only thing I would keep an eye on is overextending your margin commitment if you’re used to running multiple trades at the same time.
In that case it might be worth considering loading a small ‘buffer’ of excess funds into your account, just to avoid running out of unallocated funds for your margin.
Anyway, I do have a few tricks up my sleeve, and I’m happy to share them if we do need to whip them out.
Until then, trade safely my friend, and I’ll catch up with you next time.