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?
Is there a “January Effect” in Forex? | Trading Forex
Pundits often talk about a certain “January Effect” that may or may not occur in stock markets. Forex traders wonder if a similar effect might also take place in the Forex market and, as it's January right now, it seems like a good moment to investigate whether or not some kind of “January effect” exists in Forex.
What is the “January Effect”?
When people talk about the “January Effect” manifesting in stock markets, they are actually talking about two different phenomena:1. A supposed tendency of stock markets to rise during the month of January. If this were true, it would mean there would be an edge in buying stocks at the beginning of the month and selling at the end of January.
2. A supposed tendency of the yearly price change of stock markets to follow the January price change. If this were true, it would mean there would be an edge in waiting until the END of January, and buying stocks if prices had risen during January, or alternatively selling if prices had fallen over the month. Trades would be exited at the end of the year.
Extrapolating from a belief that either or both of these assumptions are correct, it could then be said that the U.S. stock market affects the U.S. dollar which in turn is the major engine behind the Forex market, and as such there must be some kind of “January effect” in the Forex market as well.
Maybe it is best to begin by determining whether there is evidence of some kind of “January effect” playing out in the U.S. stock market by looking at historical price movements of the S&P 500 Index.
Do U.S. Stocks Tend to Rise in January?
This question should actually be rephrased slightly in order to make it more accurate. The real question is not whether stocks tend to rise in January – the U.S. stock market has a clear long bias, meaning that any month is on average a rising month. The question is, therefore, not whether stocks tend to rise in January, but whether stocks generally rise in January more than they do in other months. If we look at the S&P 500 Index since 1950, we find that the average January during this period has seen a rise of 1.79% in the Index. However if we take every single month during this 65 year period, we find that the average month has seen a rise in the Index of only 0.65%. This shows clearly that since 1950, stocks have tended to rise almost three times more in January than they do in any given month.The next question is whether what happens in January to the stock market is predictive of what will happen during the rest of the calendar year.
Does U.S. Stock Performance in January Foreshadow the Rest of the Year?
We can look at this clearly by using Excel to calculate the correlation coefficient between the performances of the Index over the month of January as compared to its performance over the next 11 months. There is indeed a positive correlation coefficient of 0.25, which is a meaningfully strong number. However we could ask whether this is the same for any month, i.e. what is the correlation between the performance of any given month and the performance over the subsequent 11 months? The answer is that sampling every month gives a correlation coefficient of only 0.016, so this is very indicative that the old Wall Street saying “As goes January, so goes the year” has some historical truth to it. However it should be noted that of the 26 negative Januarys included in the sample, only 11 presaged a negative year, so the effect is greater on the long side.Now that we have established that there seems to be some empirical truth to (both forms of) the January effect, let’s see if we can apply this to Forex.
Does the U.S. Dollar Tend to Rise in January?
We can test this by examining what happened to the U.S. Dollar Index during historical Januarys. For convenience, I used historical data published by the U.S. Federal Reserve showing the Broad Nominal Index from 1974 to date. Looking at these 42 January months, the average month produced a positive change in the Index of 0.48%. Additionally, 60% of these months saw a positive rather than negative change in the Index. This suggests that the U.S. Dollar has tended to rise in January rather than fall, albeit by considerably less than the S&P 500 Index.Is the Calendar Year for the U.S. Dollar Driven by January Performance?
Again, all that we need to do is calculate the correlation coefficient of the January performances with the performances for the remainder of that calendar year. There is a positive correlation coefficient of 0.18, which is a meaningfully strong number. If we compare the result for the subsequent 11 months correlation to every month within the sample – not only Januarys – we get a correlation coefficient of 0.12. This suggests that there is some “January driver” effect, but it is quite small, certainly compared to the effect shown by the S&P 500 Index.Conclusion
Both the S&P 500 Index of the major 500 U.S. stocks and the U.S. dollar have exhibited both variations of the “January effect”: both have shown a tendency to rise during the month of January, and for January’s performance to drive the rest of the calendar year. However what really stands out is that both the U.S. stock market and the U.S. dollar have shown clear tendencies to rise during the month of January.Source
Is there a “January Effect” in Forex? | Trading Forex
Pundits often talk about a certain “January Effect” that may or may not occur in stock markets. Forex traders wonder if a similar effect might also take place in the Forex market and, as it's January right now, it seems like a good moment to investigate whether or not some kind of “January effect” exists in Forex.
What is the “January Effect”?
When people talk about the “January Effect” manifesting in stock markets, they are actually talking about two different phenomena:1. A supposed tendency of stock markets to rise during the month of January. If this were true, it would mean there would be an edge in buying stocks at the beginning of the month and selling at the end of January.
2. A supposed tendency of the yearly price change of stock markets to follow the January price change. If this were true, it would mean there would be an edge in waiting until the END of January, and buying stocks if prices had risen during January, or alternatively selling if prices had fallen over the month. Trades would be exited at the end of the year.
Extrapolating from a belief that either or both of these assumptions are correct, it could then be said that the U.S. stock market affects the U.S. dollar which in turn is the major engine behind the Forex market, and as such there must be some kind of “January effect” in the Forex market as well.
Maybe it is best to begin by determining whether there is evidence of some kind of “January effect” playing out in the U.S. stock market by looking at historical price movements of the S&P 500 Index.
Do U.S. Stocks Tend to Rise in January?
This question should actually be rephrased slightly in order to make it more accurate. The real question is not whether stocks tend to rise in January – the U.S. stock market has a clear long bias, meaning that any month is on average a rising month. The question is, therefore, not whether stocks tend to rise in January, but whether stocks generally rise in January more than they do in other months. If we look at the S&P 500 Index since 1950, we find that the average January during this period has seen a rise of 1.79% in the Index. However if we take every single month during this 65 year period, we find that the average month has seen a rise in the Index of only 0.65%. This shows clearly that since 1950, stocks have tended to rise almost three times more in January than they do in any given month.The next question is whether what happens in January to the stock market is predictive of what will happen during the rest of the calendar year.
Does U.S. Stock Performance in January Foreshadow the Rest of the Year?
We can look at this clearly by using Excel to calculate the correlation coefficient between the performances of the Index over the month of January as compared to its performance over the next 11 months. There is indeed a positive correlation coefficient of 0.25, which is a meaningfully strong number. However we could ask whether this is the same for any month, i.e. what is the correlation between the performance of any given month and the performance over the subsequent 11 months? The answer is that sampling every month gives a correlation coefficient of only 0.016, so this is very indicative that the old Wall Street saying “As goes January, so goes the year” has some historical truth to it. However it should be noted that of the 26 negative Januarys included in the sample, only 11 presaged a negative year, so the effect is greater on the long side.Now that we have established that there seems to be some empirical truth to (both forms of) the January effect, let’s see if we can apply this to Forex.
Does the U.S. Dollar Tend to Rise in January?
We can test this by examining what happened to the U.S. Dollar Index during historical Januarys. For convenience, I used historical data published by the U.S. Federal Reserve showing the Broad Nominal Index from 1974 to date. Looking at these 42 January months, the average month produced a positive change in the Index of 0.48%. Additionally, 60% of these months saw a positive rather than negative change in the Index. This suggests that the U.S. Dollar has tended to rise in January rather than fall, albeit by considerably less than the S&P 500 Index.Is the Calendar Year for the U.S. Dollar Driven by January Performance?
Again, all that we need to do is calculate the correlation coefficient of the January performances with the performances for the remainder of that calendar year. There is a positive correlation coefficient of 0.18, which is a meaningfully strong number. If we compare the result for the subsequent 11 months correlation to every month within the sample – not only Januarys – we get a correlation coefficient of 0.12. This suggests that there is some “January driver” effect, but it is quite small, certainly compared to the effect shown by the S&P 500 Index.Conclusion
Both the S&P 500 Index of the major 500 U.S. stocks and the U.S. dollar have exhibited both variations of the “January effect”: both have shown a tendency to rise during the month of January, and for January’s performance to drive the rest of the calendar year. However what really stands out is that both the U.S. stock market and the U.S. dollar have shown clear tendencies to rise during the month of January.Source
Is there a “January Effect” in Forex? | Trading Forex
Pundits often talk about a certain “January Effect” that may or may not occur in stock markets. Forex traders wonder if a similar effect might also take place in the Forex market and, as it's January right now, it seems like a good moment to investigate whether or not some kind of “January effect” exists in Forex.
What is the “January Effect”?
When people talk about the “January Effect” manifesting in stock markets, they are actually talking about two different phenomena:1. A supposed tendency of stock markets to rise during the month of January. If this were true, it would mean there would be an edge in buying stocks at the beginning of the month and selling at the end of January.
2. A supposed tendency of the yearly price change of stock markets to follow the January price change. If this were true, it would mean there would be an edge in waiting until the END of January, and buying stocks if prices had risen during January, or alternatively selling if prices had fallen over the month. Trades would be exited at the end of the year.
Extrapolating from a belief that either or both of these assumptions are correct, it could then be said that the U.S. stock market affects the U.S. dollar which in turn is the major engine behind the Forex market, and as such there must be some kind of “January effect” in the Forex market as well.
Maybe it is best to begin by determining whether there is evidence of some kind of “January effect” playing out in the U.S. stock market by looking at historical price movements of the S&P 500 Index.
Do U.S. Stocks Tend to Rise in January?
This question should actually be rephrased slightly in order to make it more accurate. The real question is not whether stocks tend to rise in January – the U.S. stock market has a clear long bias, meaning that any month is on average a rising month. The question is, therefore, not whether stocks tend to rise in January, but whether stocks generally rise in January more than they do in other months. If we look at the S&P 500 Index since 1950, we find that the average January during this period has seen a rise of 1.79% in the Index. However if we take every single month during this 65 year period, we find that the average month has seen a rise in the Index of only 0.65%. This shows clearly that since 1950, stocks have tended to rise almost three times more in January than they do in any given month.The next question is whether what happens in January to the stock market is predictive of what will happen during the rest of the calendar year.
Does U.S. Stock Performance in January Foreshadow the Rest of the Year?
We can look at this clearly by using Excel to calculate the correlation coefficient between the performances of the Index over the month of January as compared to its performance over the next 11 months. There is indeed a positive correlation coefficient of 0.25, which is a meaningfully strong number. However we could ask whether this is the same for any month, i.e. what is the correlation between the performance of any given month and the performance over the subsequent 11 months? The answer is that sampling every month gives a correlation coefficient of only 0.016, so this is very indicative that the old Wall Street saying “As goes January, so goes the year” has some historical truth to it. However it should be noted that of the 26 negative Januarys included in the sample, only 11 presaged a negative year, so the effect is greater on the long side.Now that we have established that there seems to be some empirical truth to (both forms of) the January effect, let’s see if we can apply this to Forex.
Does the U.S. Dollar Tend to Rise in January?
We can test this by examining what happened to the U.S. Dollar Index during historical Januarys. For convenience, I used historical data published by the U.S. Federal Reserve showing the Broad Nominal Index from 1974 to date. Looking at these 42 January months, the average month produced a positive change in the Index of 0.48%. Additionally, 60% of these months saw a positive rather than negative change in the Index. This suggests that the U.S. Dollar has tended to rise in January rather than fall, albeit by considerably less than the S&P 500 Index.Is the Calendar Year for the U.S. Dollar Driven by January Performance?
Again, all that we need to do is calculate the correlation coefficient of the January performances with the performances for the remainder of that calendar year. There is a positive correlation coefficient of 0.18, which is a meaningfully strong number. If we compare the result for the subsequent 11 months correlation to every month within the sample – not only Januarys – we get a correlation coefficient of 0.12. This suggests that there is some “January driver” effect, but it is quite small, certainly compared to the effect shown by the S&P 500 Index.Conclusion
Both the S&P 500 Index of the major 500 U.S. stocks and the U.S. dollar have exhibited both variations of the “January effect”: both have shown a tendency to rise during the month of January, and for January’s performance to drive the rest of the calendar year. However what really stands out is that both the U.S. stock market and the U.S. dollar have shown clear tendencies to rise during the month of January.Source
Is there a “January Effect” in Forex? | Trading Forex
Pundits often talk about a certain “January Effect” that may or may not occur in stock markets. Forex traders wonder if a similar effect might also take place in the Forex market and, as it's January right now, it seems like a good moment to investigate whether or not some kind of “January effect” exists in Forex.
What is the “January Effect”?
When people talk about the “January Effect” manifesting in stock markets, they are actually talking about two different phenomena:1. A supposed tendency of stock markets to rise during the month of January. If this were true, it would mean there would be an edge in buying stocks at the beginning of the month and selling at the end of January.
2. A supposed tendency of the yearly price change of stock markets to follow the January price change. If this were true, it would mean there would be an edge in waiting until the END of January, and buying stocks if prices had risen during January, or alternatively selling if prices had fallen over the month. Trades would be exited at the end of the year.
Extrapolating from a belief that either or both of these assumptions are correct, it could then be said that the U.S. stock market affects the U.S. dollar which in turn is the major engine behind the Forex market, and as such there must be some kind of “January effect” in the Forex market as well.
Maybe it is best to begin by determining whether there is evidence of some kind of “January effect” playing out in the U.S. stock market by looking at historical price movements of the S&P 500 Index.
Do U.S. Stocks Tend to Rise in January?
This question should actually be rephrased slightly in order to make it more accurate. The real question is not whether stocks tend to rise in January – the U.S. stock market has a clear long bias, meaning that any month is on average a rising month. The question is, therefore, not whether stocks tend to rise in January, but whether stocks generally rise in January more than they do in other months. If we look at the S&P 500 Index since 1950, we find that the average January during this period has seen a rise of 1.79% in the Index. However if we take every single month during this 65 year period, we find that the average month has seen a rise in the Index of only 0.65%. This shows clearly that since 1950, stocks have tended to rise almost three times more in January than they do in any given month.The next question is whether what happens in January to the stock market is predictive of what will happen during the rest of the calendar year.
Does U.S. Stock Performance in January Foreshadow the Rest of the Year?
We can look at this clearly by using Excel to calculate the correlation coefficient between the performances of the Index over the month of January as compared to its performance over the next 11 months. There is indeed a positive correlation coefficient of 0.25, which is a meaningfully strong number. However we could ask whether this is the same for any month, i.e. what is the correlation between the performance of any given month and the performance over the subsequent 11 months? The answer is that sampling every month gives a correlation coefficient of only 0.016, so this is very indicative that the old Wall Street saying “As goes January, so goes the year” has some historical truth to it. However it should be noted that of the 26 negative Januarys included in the sample, only 11 presaged a negative year, so the effect is greater on the long side.Now that we have established that there seems to be some empirical truth to (both forms of) the January effect, let’s see if we can apply this to Forex.
Does the U.S. Dollar Tend to Rise in January?
We can test this by examining what happened to the U.S. Dollar Index during historical Januarys. For convenience, I used historical data published by the U.S. Federal Reserve showing the Broad Nominal Index from 1974 to date. Looking at these 42 January months, the average month produced a positive change in the Index of 0.48%. Additionally, 60% of these months saw a positive rather than negative change in the Index. This suggests that the U.S. Dollar has tended to rise in January rather than fall, albeit by considerably less than the S&P 500 Index.Is the Calendar Year for the U.S. Dollar Driven by January Performance?
Again, all that we need to do is calculate the correlation coefficient of the January performances with the performances for the remainder of that calendar year. There is a positive correlation coefficient of 0.18, which is a meaningfully strong number. If we compare the result for the subsequent 11 months correlation to every month within the sample – not only Januarys – we get a correlation coefficient of 0.12. This suggests that there is some “January driver” effect, but it is quite small, certainly compared to the effect shown by the S&P 500 Index.Conclusion
Both the S&P 500 Index of the major 500 U.S. stocks and the U.S. dollar have exhibited both variations of the “January effect”: both have shown a tendency to rise during the month of January, and for January’s performance to drive the rest of the calendar year. However what really stands out is that both the U.S. stock market and the U.S. dollar have shown clear tendencies to rise during the month of January.Source
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