AskPips.com

HappyPip

Traders can contact the CFTC regarding their reactions to the proposed rules. They can email secretary@cftc.gov with "Regulation of Retail Forex" in the subject line.

The CFTC plans to reduce leverage from 100:1 to 10:1 in order to protect traders from over-leveraging. This means that they are trying to help traders minimize their losses. However, this discourages some traders, particularly those who are able to manage their risk properly, from trading with US brokers. For some, this rule seems "over protective" and restrictive in that traders would be prevented from maximizing their profits.

7 months ago

gladiator3000

I think most of the proposed rule changes are a great for traders. They bring more transparency of who you are dealing with--whether it be a broker, investment manager, IB's, etc.--and holds them to certain standards that separates the trustworthy companies from the rest.

I wouldn't venture to guess exactly why the CFTC has proposed the max leverage change or why they chose 10:1. That's not important. What is important is the effect. This change, if it goes into effect, reduces the ability for small traders to make big profits on their small accounts. Here's a quick example:

Let's say a noob has been testing out a system and is finally confident enough to trade live. They only have $200 to start.

Let's say this noob wants to short USDJPY. At 100:1, he can open a position with a max value of $20,000. That's the max position size, but leaves no room for volatility as it takes all $200 to open up the position. So let's say the trader shorts 10,000 units of USDJPY. This leaves $100 left in the account to weather volatility. At 10k units, each pip is worth 1.10 a pip. So, if the trade goes the noob's way 100 pips, then the noob makes $110. That's a 55% gain on the account. Awesomeness. Of course, if the trade went about 90 pips against him, then his trade gets margin called. Hopefully, the noob closes the trade before the trade goes this far against him.

Now, if the max leverage is 10:1, then the max trade size on a $200 is $2000. Again, the noob account for volatility, so he opens a position that leaves $100 as usable margin. He shorts USDJPY 1k units. The value per pip is $0.11. If the pair went 100 pips his way 100 pips, he makes $11.

That's a 5.5% gain on his account, which is great, but it's no 55% gain.

This example highlights "the problem" most noobs have with the potential change. They view forex trading as a way to "get rich quick." And it can be with 100:1 leverage, but the risk is high of blowing out your account on one or two trades.

At 10:1, forex trading is still profitable, but it won't take those with small starting accounts to the promised land of "six figure incomes, no boss and working from home" overnight.

Whether this is good or bad, only time will tell, along whether or not they make the decision or not. We'll just have to wait and see!

Hope this helps.

7 months ago