I did not want to write this article right after the information have been publish, but I wanted to let the emotions cool down and so I am writing my article with certain delay.
I will not discuss in details on what ESMA has announced, since most of you know it. In my article I will focus on practical impacts. However, in short, I will explain what is actually going on.
Tightening regulation for forex and binary options
ESMA is the European Securities and Markets Authority and recently has issued several new regulations. The first is focused on binary options that will be banned, which is good news. But they have prepared some more:
- Leverage decrease to 1:30 for Forex, for CFD’s (commodities, stock …) 1:20, and 1:2 for cryptocurrencies.
- Brokers must protect clients against the negative balance on the account.
How does it affect traders? Is good old forex about to finish?
On the Internet, a passionate debate has emerged around this constraints, as many traders are trying to benefit from maximum leverage to maximize their profits. Will it really be so influential?
Here’s an example.
Let’s imagine 5 traders where everyone risks in different way, from 0.25% to 3%.
In the table, you will find how many% of the account would be the margin in the case of risking certain% of capital and certain stop loss.
It would not be possible to open a trade with 3% risk on trading account with stop loss of 5 pips, because the margin would be 246% of the account, which is not possible. And honestly – it’s good too. If a slippage has occurred, which happens normally, the stop loss could be ten times breached. On the other hand, a trade with a risk of 0.5%, can be opened without any problems. And larger trades where you have SL for example 50 pips are no problem at all.
I do not use high leverage myself and I’m happy with the results. Here is an example of a single portfolio with results over two years.
I see the real problem in traders who do not know how to trade properly. Often, they do not even know how to work with the leverage and hence they lose money.
The new ESMA regulation will be applied within three or four months, but it is good to prepare now.