The European Union has published new regulations applying to retail Forex, CFD, and the few remaining binary options brokerages in its territory. If you have an account with one such brokerage, the regulations will affect you when they come into force during the late spring and summer. This article will outline how the new regulations will impact your bottom line.
Details of the New ESMA Regulations
In March 2018, the European Securities and Markets Authority (ESMA), the financial regulator and supervisor of the European Union, announced new regulations concerning the provision of contracts for differences (CFDs) and binary options to retail investors. It is unclear exactly when the regulations will come into force, but some time in May or June 2018 looks to be the most likely date, and Forex and CFD brokerages located within the European Union (including the United Kingdom, for the time being) will be forced to comply. The regulations will need to be renewed by ESMA every three months to remain in force over the long term.
The regulation concerning binary options is very simple: they may not be sold. In simple terms, this is the end of binary options as a product sold from within the European Union.
The regulations concerning CFDs are more complex but still relatively straightforward. Firstly, there is some confusion as to what exactly is a CFD, with many traders thinking that spot Forex is not considered a CFD and will therefore be exempt from the new regulations. They are wrong: spot Forex is technically defined as a CFD. In fact, every asset you see available for trading at Forex / CFD brokers will most likely be subject to the new regulations.
The new regulations will implement the following changes for retail client accounts (more on who is a retail client; later).
-
The maximum leverage which can be offered will be 30 to 1. That will apply to major currency pairs such as EUR/USD, GBP/USD, USD/JPY, etc.
-
Other currency pairs, major equity indices, and gold will be subject to a maximum leverage of 20 to 1.
-
Individual equities cannot be offered with leverage greater than 5 to 1.
-
Cryptocurrencies are subject to a maximum leverage of 2 to 1.
-
Brokers will be required to provide negative balance protection, meaning it will be impossible to lose more money than you deposit.
-
Brokers will be required to close a clients open positions when the account equity reaches 50% of the required minimum margin by all open positions. This ;margin call; provision can be tricky to understand, so will be explained in more detail later.
-
Bonuses or any other form of trading incentives may not be offered.
-
Brokers will be required to display a standardized risk warning which will include the percentage of their clients who lose money over a defined period.
Understanding the ;Margin Call; Regulation
The best way to understand the 50% margin call provision is to use an example. Imagine a client opens an account with a Forex broker, depositing ;100 in total. The client opens a short trade in EUR/USD, by going short one mini-lot (one tenth of a full lot). One full lot of EUR/USD is worth ;10,000, meaning one mini-lot is worth ;1,000. To find out the minimum margin required to support that trade, we divide the size of the trade (;1,000) by 30, which comes to ;33.33. This is the minimum required margin to maintain the trade. Half of that amount is ;16.67. Now assume the trade goes against the client, with the price of EUR/USD rising above the entry price. As soon as the price rises far enough to produce a floating loss of ;83.33 (;100 - ;16.67), the broker must close the trade out, even if the trade has no stop loss or has not yet reached the stop loss. In theory, this means that a client;s account can never reach zero. Examples involving multiple open trades will be more complex, but will operate according to the same principles.
What Will This Mean for Traders?
The regulations will only apply to ;retail clients;, so you might try to apply to be classed as a professional trader. To get a broker to classify you as anything other than a retail client, you will have to show you have financial qualifications, a large amount of liquid assets, plenty of experience trading, and usually that you also trade frequently. Most traders will be unable to qualify, although it is worth noting that one London-based brokerage, IG Group, has stated that their proportion of clients now classified as recently increased from 5% to 15% of their total customers.
The major impact these regulations will have on traders is simple ndash; the maximum trade size they can possibly make at brokers regulated in the European Union will shrink. Many will say that the maximum leverage limits still offer far more than any trader could need, and I agree. I am wary of leverage and I hate to see anyone using leverage greater than 3 to 1 for Forex under any conditions, or any leverage at all for stocks and cryptocurrencies. Commodities can also fluctuate wildly in value. Too many people forget that the biggest danger in leverage is not overly large position sizing, it is that a ldquo;black swan rdquo; event such as the CHF flash crash of 2015 could happen and wipe out your account through huge price slippage. However, there is another factor that is widely forgotten: why assume that a trader rsquo;s account at one Forex broker is all the money they have in the world? For example, a trader might have $10,000 in the bank. If they deposit $1,000 at a broker offering maximum leverage of 300 to 1, they can trade up to $300,000. At a leverage limit of 30 to 1, that trader will have to deposit their entire $10,000 fund to trade at the same size. In a real sense, that trader might now have to take on more risk to operate in the same way, because if the broker goes bust, while beforehand they might lose $1,000 now they could lose $10,000! Even without negative balance protection, that broker would still have to come after them to try to get an extra $9,000 which they theoretically risk. Yet we saw after the CHF crash that brokers don rsquo;t come after every single client whose losses exceeded their deposit, due to legal costs and reputational issues. This shows that although the stated purpose of the regulation is to protect traders from excessive losses, the story is not as simple as you may think.
Beyond having to deposit more margin, and automatic margin calls, the other major change for traders will be that they will enjoy negative balance protection. This is a positive development which hopefully will make brokerages focus more heavily on the risks they are taking with their business model in the market. At the same time, a possible side effect of the new regulation is the potential increase in average deposits, leading to brokerages being more stable and better capitalized with client funds. Two final notes: brokerages will have to report on their websites the percentages of clients who are losing and making money, although the period over which the statistics must refer to is currently not clear. This will help to shed light on the debate over what percentage of retail traders are profitable, although some brokerages have already released what they claim to be accurate statistics showing that clients with larger account sizes tend to perform better as traders. Additionally, bonuses and promotions will be banned. I welcome this, as not only do they trivialize the serious business of trading, they are almost always a trick offering the illusion of free money whilst preventing traders from withdrawing any profits until a large number of trades are made (read the fine print the next time you squo;).
What If Yoursquo;re Not Happy Remaining in the EU?
Traders with accounts at affected brokers who cannot obtain professional status classification and feel they really need higher leverage than the ESMA limits outlined above might look for a solution by opening accounts with brokers outside the European Union. The most obvious destination would be Australia or New Zealand, where it will still be possible to find reasonably well-regulated Forex brokerages offering leverage in the range of 400 to 1. A recent development that is not talked about much is the growing difficulty of transferring funds to and from Forex brokerages in less tightly regulated jurisdictions. You might decide to open an account with a brokerage in Vanuatu, but you may find that a bank within the European Union might just refuse to send your money there for a deposit. This means that going far offshore, depending upon where you live, may not be a feasible option. In any case, the new regule impossible to live with, and overall there is a compelling case that they are a net benefit to any trader, so why migrate?
The Seven Deadly Sins of Trading | Trading Forex
Trading is a wonderful business. No inventories to worry about, no employees, nobody to answer to, you can set your own hours; the list of benefits goes on and on.
However, as in any other business venture, you must know what you are doing if you are to have any chance of success. Trading, as in any business venture, is fraught with danger. Bad trading habits can wipe out those that do not take the proper precautions very quickly. Success comes from hard work, dedication, and long hours of practice and study.
As traders, for us to have a shot at consistent profitability, we must be disciplined and adhere to a strict course of action, remain focused, and avoid the...
7 Deadly Sins of Trading
Sin #1) Trading without a plan.
Most traders attempt to trade without a plan. They hear something, a rumor perhaps, or they think some big market moving event is about to happen and they ‘just know’ which way it will move. Well, I suppose that is fine if you have a plan, a reasonable course of action. But alas, most traders seldom do.Most commonly, traders find themselves with fabulous paper profits but then watch it all evaporate and turn into a nasty loss! That would never have happened if they had a plan.
If you want to be a trader, you need to create a trade plan for yourself. Your plan should cover:
a) A method of how and where you are going to enter the market.
b) How much risk to take on each trade?
c) What percentage of account equity to risk per trade?
d) What to do when a trades goes wrong. Where do you exit?
e) What to do when a trade goes right. Where do you exit?
f) How long to give a trade to start working before pulling the plug on it.
g) What are my odds/probabilities of a successful trade? A losing trade?
Sin #2) Averaging Down a Loss
If laddering into a multi-contract position is not in your trade plan, then don’t even think adding to a losing position! When you are dealing with the type of leverage available in Forex and futures trading, this ‘sin’ could be, and has been the financial ruin of many traders! Take the loss and move on.Sin #3) Over Exposure
The third sin of trading is tied directly to our personalities as traders. We traders tend to be ‘A’ type personalities. We have a tendency to get a little cocky as our wins pile up, and to think we're immune to the sins of trading. We get a little too over confident for our own good and this can adversely affect the risk parameters of our trade plans. Never increase your trade size as a percentage of account size. Once you increase your percentages, your profits will increase exponentially, but so too do the losses. Just don’t do it! I’ll save the ‘Math of Trading’ for another article.Sin #4) Over Playing Your Hand
I’ve been found guilty of this trading sin many times as I’m sure most other traders have also.You are in a nice winning position and price reaches your target and you wait to see if it will keep moving in your favor - Greed has kicked in!.
It keeps going through your target, you’re feeling warm, fuzzy and smart and then, without warning, it’s moving hard against you. What a shame! Your target was reached, you had nice profits, but failed to honor it and take the money. Now you have nothing (or worse). You turned a winner into a loser – don't let greed take the wheel.
Sin #5) Leaving The Money
There is nothing wrong with allowing your account to grow. But you also need to remove a percentage of your profits on a regular basis as compensation for your hard work. You also want to be at the point where you are playing with ‘the house's money’ as soon as you can. Think of your original stake as a loan. You want to get that loan paid off just as quickly as possible so that all further withdrawals are all yours! Let’s not even mention that from that point on, your original risk capital is now safe and sound, you are now financially ahead, trading with winnings. Ah, what a feeling!Sin #6) Lack of Patience
A tough principle for most people, let alone traders. Lack of patience. The patience to be able to sit, wait, and watch for your signal or set up before initiating a trade is an absolute prerequisite! If you just start ‘punching in’ anywhere because you think the market is going to go up, or you think it’s going to tank, you have just crossed that dangerously thin line between a disciplined trader and a self-destructive gambler. We all know how that scenario will play out over time.Sin #7) Switching Your Strategy During Game Time
This I think is the worst possible ‘sin’ a trader can commit. When the market is open and you are watching every tick, the combination of adrenaline and emotion can really impair and affect your judgement. Apart from having a trade plan and following it, plan your trades and strategy while the market is closed. That is the time when you can plan rationally and apply sound judgement to your analysis. During the trading session, unless there is a very obvious change in the marketplace, don’t alter your game plan. Doing so is usually the result of an emotional, impulsive reaction to some minor event and you’ll end up undoing all your rational planning. Make your plan and stick with it!May the ‘Gods of Odds’ shine favorably upon you – and may the sins of trading be permanently banished from your life!
Source
The Seven Deadly Sins of Trading | Trading Forex
Trading is a wonderful business. No inventories to worry about, no employees, nobody to answer to, you can set your own hours; the list of benefits goes on and on.
However, as in any other business venture, you must know what you are doing if you are to have any chance of success. Trading, as in any business venture, is fraught with danger. Bad trading habits can wipe out those that do not take the proper precautions very quickly. Success comes from hard work, dedication, and long hours of practice and study.
As traders, for us to have a shot at consistent profitability, we must be disciplined and adhere to a strict course of action, remain focused, and avoid the...
7 Deadly Sins of Trading
Sin #1) Trading without a plan.
Most traders attempt to trade without a plan. They hear something, a rumor perhaps, or they think some big market moving event is about to happen and they ‘just know’ which way it will move. Well, I suppose that is fine if you have a plan, a reasonable course of action. But alas, most traders seldom do.Most commonly, traders find themselves with fabulous paper profits but then watch it all evaporate and turn into a nasty loss! That would never have happened if they had a plan.
If you want to be a trader, you need to create a trade plan for yourself. Your plan should cover:
a) A method of how and where you are going to enter the market.
b) How much risk to take on each trade?
c) What percentage of account equity to risk per trade?
d) What to do when a trades goes wrong. Where do you exit?
e) What to do when a trade goes right. Where do you exit?
f) How long to give a trade to start working before pulling the plug on it.
g) What are my odds/probabilities of a successful trade? A losing trade?
Sin #2) Averaging Down a Loss
If laddering into a multi-contract position is not in your trade plan, then don’t even think adding to a losing position! When you are dealing with the type of leverage available in Forex and futures trading, this ‘sin’ could be, and has been the financial ruin of many traders! Take the loss and move on.Sin #3) Over Exposure
The third sin of trading is tied directly to our personalities as traders. We traders tend to be ‘A’ type personalities. We have a tendency to get a little cocky as our wins pile up, and to think we're immune to the sins of trading. We get a little too over confident for our own good and this can adversely affect the risk parameters of our trade plans. Never increase your trade size as a percentage of account size. Once you increase your percentages, your profits will increase exponentially, but so too do the losses. Just don’t do it! I’ll save the ‘Math of Trading’ for another article.Sin #4) Over Playing Your Hand
I’ve been found guilty of this trading sin many times as I’m sure most other traders have also.You are in a nice winning position and price reaches your target and you wait to see if it will keep moving in your favor - Greed has kicked in!.
It keeps going through your target, you’re feeling warm, fuzzy and smart and then, without warning, it’s moving hard against you. What a shame! Your target was reached, you had nice profits, but failed to honor it and take the money. Now you have nothing (or worse). You turned a winner into a loser – don't let greed take the wheel.
Sin #5) Leaving The Money
There is nothing wrong with allowing your account to grow. But you also need to remove a percentage of your profits on a regular basis as compensation for your hard work. You also want to be at the point where you are playing with ‘the house's money’ as soon as you can. Think of your original stake as a loan. You want to get that loan paid off just as quickly as possible so that all further withdrawals are all yours! Let’s not even mention that from that point on, your original risk capital is now safe and sound, you are now financially ahead, trading with winnings. Ah, what a feeling!Sin #6) Lack of Patience
A tough principle for most people, let alone traders. Lack of patience. The patience to be able to sit, wait, and watch for your signal or set up before initiating a trade is an absolute prerequisite! If you just start ‘punching in’ anywhere because you think the market is going to go up, or you think it’s going to tank, you have just crossed that dangerously thin line between a disciplined trader and a self-destructive gambler. We all know how that scenario will play out over time.Sin #7) Switching Your Strategy During Game Time
This I think is the worst possible ‘sin’ a trader can commit. When the market is open and you are watching every tick, the combination of adrenaline and emotion can really impair and affect your judgement. Apart from having a trade plan and following it, plan your trades and strategy while the market is closed. That is the time when you can plan rationally and apply sound judgement to your analysis. During the trading session, unless there is a very obvious change in the marketplace, don’t alter your game plan. Doing so is usually the result of an emotional, impulsive reaction to some minor event and you’ll end up undoing all your rational planning. Make your plan and stick with it!May the ‘Gods of Odds’ shine favorably upon you – and may the sins of trading be permanently banished from your life!
Source
The Seven Deadly Sins of Trading | Trading Forex
Trading is a wonderful business. No inventories to worry about, no employees, nobody to answer to, you can set your own hours; the list of benefits goes on and on.
However, as in any other business venture, you must know what you are doing if you are to have any chance of success. Trading, as in any business venture, is fraught with danger. Bad trading habits can wipe out those that do not take the proper precautions very quickly. Success comes from hard work, dedication, and long hours of practice and study.
As traders, for us to have a shot at consistent profitability, we must be disciplined and adhere to a strict course of action, remain focused, and avoid the...
7 Deadly Sins of Trading
Sin #1) Trading without a plan.
Most traders attempt to trade without a plan. They hear something, a rumor perhaps, or they think some big market moving event is about to happen and they ‘just know’ which way it will move. Well, I suppose that is fine if you have a plan, a reasonable course of action. But alas, most traders seldom do.Most commonly, traders find themselves with fabulous paper profits but then watch it all evaporate and turn into a nasty loss! That would never have happened if they had a plan.
If you want to be a trader, you need to create a trade plan for yourself. Your plan should cover:
a) A method of how and where you are going to enter the market.
b) How much risk to take on each trade?
c) What percentage of account equity to risk per trade?
d) What to do when a trades goes wrong. Where do you exit?
e) What to do when a trade goes right. Where do you exit?
f) How long to give a trade to start working before pulling the plug on it.
g) What are my odds/probabilities of a successful trade? A losing trade?
Sin #2) Averaging Down a Loss
If laddering into a multi-contract position is not in your trade plan, then don’t even think adding to a losing position! When you are dealing with the type of leverage available in Forex and futures trading, this ‘sin’ could be, and has been the financial ruin of many traders! Take the loss and move on.Sin #3) Over Exposure
The third sin of trading is tied directly to our personalities as traders. We traders tend to be ‘A’ type personalities. We have a tendency to get a little cocky as our wins pile up, and to think we're immune to the sins of trading. We get a little too over confident for our own good and this can adversely affect the risk parameters of our trade plans. Never increase your trade size as a percentage of account size. Once you increase your percentages, your profits will increase exponentially, but so too do the losses. Just don’t do it! I’ll save the ‘Math of Trading’ for another article.Sin #4) Over Playing Your Hand
I’ve been found guilty of this trading sin many times as I’m sure most other traders have also.You are in a nice winning position and price reaches your target and you wait to see if it will keep moving in your favor - Greed has kicked in!.
It keeps going through your target, you’re feeling warm, fuzzy and smart and then, without warning, it’s moving hard against you. What a shame! Your target was reached, you had nice profits, but failed to honor it and take the money. Now you have nothing (or worse). You turned a winner into a loser – don't let greed take the wheel.
Sin #5) Leaving The Money
There is nothing wrong with allowing your account to grow. But you also need to remove a percentage of your profits on a regular basis as compensation for your hard work. You also want to be at the point where you are playing with ‘the house's money’ as soon as you can. Think of your original stake as a loan. You want to get that loan paid off just as quickly as possible so that all further withdrawals are all yours! Let’s not even mention that from that point on, your original risk capital is now safe and sound, you are now financially ahead, trading with winnings. Ah, what a feeling!Sin #6) Lack of Patience
A tough principle for most people, let alone traders. Lack of patience. The patience to be able to sit, wait, and watch for your signal or set up before initiating a trade is an absolute prerequisite! If you just start ‘punching in’ anywhere because you think the market is going to go up, or you think it’s going to tank, you have just crossed that dangerously thin line between a disciplined trader and a self-destructive gambler. We all know how that scenario will play out over time.Sin #7) Switching Your Strategy During Game Time
This I think is the worst possible ‘sin’ a trader can commit. When the market is open and you are watching every tick, the combination of adrenaline and emotion can really impair and affect your judgement. Apart from having a trade plan and following it, plan your trades and strategy while the market is closed. That is the time when you can plan rationally and apply sound judgement to your analysis. During the trading session, unless there is a very obvious change in the marketplace, don’t alter your game plan. Doing so is usually the result of an emotional, impulsive reaction to some minor event and you’ll end up undoing all your rational planning. Make your plan and stick with it!May the ‘Gods of Odds’ shine favorably upon you – and may the sins of trading be permanently banished from your life!
Source
The Seven Deadly Sins of Trading | Trading Forex
Trading is a wonderful business. No inventories to worry about, no employees, nobody to answer to, you can set your own hours; the list of benefits goes on and on.
However, as in any other business venture, you must know what you are doing if you are to have any chance of success. Trading, as in any business venture, is fraught with danger. Bad trading habits can wipe out those that do not take the proper precautions very quickly. Success comes from hard work, dedication, and long hours of practice and study.
As traders, for us to have a shot at consistent profitability, we must be disciplined and adhere to a strict course of action, remain focused, and avoid the...
7 Deadly Sins of Trading
Sin #1) Trading without a plan.
Most traders attempt to trade without a plan. They hear something, a rumor perhaps, or they think some big market moving event is about to happen and they ‘just know’ which way it will move. Well, I suppose that is fine if you have a plan, a reasonable course of action. But alas, most traders seldom do.Most commonly, traders find themselves with fabulous paper profits but then watch it all evaporate and turn into a nasty loss! That would never have happened if they had a plan.
If you want to be a trader, you need to create a trade plan for yourself. Your plan should cover:
a) A method of how and where you are going to enter the market.
b) How much risk to take on each trade?
c) What percentage of account equity to risk per trade?
d) What to do when a trades goes wrong. Where do you exit?
e) What to do when a trade goes right. Where do you exit?
f) How long to give a trade to start working before pulling the plug on it.
g) What are my odds/probabilities of a successful trade? A losing trade?
Sin #2) Averaging Down a Loss
If laddering into a multi-contract position is not in your trade plan, then don’t even think adding to a losing position! When you are dealing with the type of leverage available in Forex and futures trading, this ‘sin’ could be, and has been the financial ruin of many traders! Take the loss and move on.Sin #3) Over Exposure
The third sin of trading is tied directly to our personalities as traders. We traders tend to be ‘A’ type personalities. We have a tendency to get a little cocky as our wins pile up, and to think we're immune to the sins of trading. We get a little too over confident for our own good and this can adversely affect the risk parameters of our trade plans. Never increase your trade size as a percentage of account size. Once you increase your percentages, your profits will increase exponentially, but so too do the losses. Just don’t do it! I’ll save the ‘Math of Trading’ for another article.Sin #4) Over Playing Your Hand
I’ve been found guilty of this trading sin many times as I’m sure most other traders have also.You are in a nice winning position and price reaches your target and you wait to see if it will keep moving in your favor - Greed has kicked in!.
It keeps going through your target, you’re feeling warm, fuzzy and smart and then, without warning, it’s moving hard against you. What a shame! Your target was reached, you had nice profits, but failed to honor it and take the money. Now you have nothing (or worse). You turned a winner into a loser – don't let greed take the wheel.
Sin #5) Leaving The Money
There is nothing wrong with allowing your account to grow. But you also need to remove a percentage of your profits on a regular basis as compensation for your hard work. You also want to be at the point where you are playing with ‘the house's money’ as soon as you can. Think of your original stake as a loan. You want to get that loan paid off just as quickly as possible so that all further withdrawals are all yours! Let’s not even mention that from that point on, your original risk capital is now safe and sound, you are now financially ahead, trading with winnings. Ah, what a feeling!Sin #6) Lack of Patience
A tough principle for most people, let alone traders. Lack of patience. The patience to be able to sit, wait, and watch for your signal or set up before initiating a trade is an absolute prerequisite! If you just start ‘punching in’ anywhere because you think the market is going to go up, or you think it’s going to tank, you have just crossed that dangerously thin line between a disciplined trader and a self-destructive gambler. We all know how that scenario will play out over time.Sin #7) Switching Your Strategy During Game Time
This I think is the worst possible ‘sin’ a trader can commit. When the market is open and you are watching every tick, the combination of adrenaline and emotion can really impair and affect your judgement. Apart from having a trade plan and following it, plan your trades and strategy while the market is closed. That is the time when you can plan rationally and apply sound judgement to your analysis. During the trading session, unless there is a very obvious change in the marketplace, don’t alter your game plan. Doing so is usually the result of an emotional, impulsive reaction to some minor event and you’ll end up undoing all your rational planning. Make your plan and stick with it!May the ‘Gods of Odds’ shine favorably upon you – and may the sins of trading be permanently banished from your life!
Source
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