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A New Era of Forex Trading? by Sam Evans

 

Since I started writing this weekly newsletter, I have often spoken about the various skills required for ongoing successful trading. Thorough planning, strict risk management and objective analysis are all key elements to a career of profitability in the Forex markets, but we also need to remember that the markets are also in a constant state of evolution. However, this evolution is not just isolated to within the area of understanding price action and the latest technical analysis techniques. We should also pay attention to the rules and regulations which govern our ability to actually take part in trading the markets themselves, which brings me on to the subject (or maybe I should say "debate") of the recent Commodity Futures Trading Commission (CFTC) proposed plans for US Forex trading.

Earlier this year, the CFTC made a dramatic proposal to reduce the leverage available to retail traders of the Forex markets. Currently, the typical leverage available to traders is around 100:1 across all lot sizes. This means that if you are trading a full size Lot of $100,000, then all you need in margin requirements is around $1000 in the trading account. In the case of trading Mini Lots of $10,000, then you would need around $100 of margin to take a position, depending on the rules of various Forex dealers worldwide. The CFTC has suggested that it intends to introduce a new rule which greatly increases the margin to take a trade in Forex, allowing a maximum leverage of just 10:1. This would mean that in the future, a trader would actually need $1000 in margin for a Mini Lot position and a much higher amount of $10,000 for the equivalent $100,000 full size Lot. See the breakdown below:

 


Figure 1

As you can imagine, this proposal has been met with varying degrees of reaction. It is the intention of the CFTC to greatly reduce the risk parameters for retail traders, thus limiting the exposure they can have in the markets in a hope to prevent extreme losses and control the frequency of account blow-outs. However, while some see this as a positive promotion of risk management, others feel that it is unfair to "nanny" traders and limit their possibilities for large returns via Forex trading. The debate is an interesting one indeed.

On one hand the CFTC is demonstrating a high level of responsibility in its proposed attempt to decrease the number of losses in the world of retail trading, but it also runs the risk of changing the very face of Forex trading for good. Some would say that it is unfair for the CFTC to limit how individuals can trade, especially seeing that they have been happy for 100:1 leverage to be available to us for so long. Why should any institution dictate to us just how much of our money we can put at risk? Is it not a personal choice which all Forex traders should be allowed to make for themselves? Or is it the true responsibility of the higher powers that be to ensure and provide a safe environment for the public to enjoy the benefit of private speculation? What is right or wrong is simply down to personal opinion and whatever will be, will be.

If the proposal does go into effect, things will change in the Forex market rapidly and it is important to look at all the possibilities. Sure, there will be less risk of overexposure for the retail trader on individual trades, but we also need to recognize that individuals will also need far larger accounts to actually take part in Forex trading, too, which raises issues of its own. Is there not the possibility that if greater margin is required to take a lesser position, then there is also the chance that bigger accounts could be potentially lost as well? And what about the security of the funds? With the Forex market being an unregulated arena, this means that if a dealer does not have adequate protection for its clients' accounts and goes under, the retail trader will lose a larger sized account at no fault of their own. This proposal runs the risk of literally sucking the life out of the Spot Forex industry as more and more traders will simply not be able to take part due to the greater level of capital needed to get trading in the first place. But we also need to remember that this could also have a positive effect on the world of Forex trading, too. Let me explain.

You see if the volume of trading does in fact dry up in the Spot Market, we also have to think about where that volume will go to, and we do have other options. Around a year ago, the Chicago Mercantile Exchange introduced a variety of new Forex products in the shape of E-Micro Forex Futures Contracts which are the Futures equivalents of Forex Mini Lots. These contracts have pretty much the same margin requirements as current Mini Lots and similar Pip values. The added benefit of them is that they are traded via the CME's regulated market, thus providing the greater safety of protected segregated accounts for traders, true market volume and superior trade execution. Would this not be a better and safer environment for all Forex traders, therefore? Right now, these are very low volume markets but if the old Forex Spot traders turn their attention to the CME, then this would potentially offer a whole new era of Forex trading for us all.

It should be noted that this new proposal will only affect US traders and is currently not being considered in other countries, but this is not to assume that if the legislation is passed in America that it won't extend worldwide. US-based traders can simply move their funds to accounts outside of the United States, but be aware that we do live in a truly globalized society and it would never surprise me if things did follow suit across the world should the CFTC pass its new rules...but then again, it is still a proposal and may still never actually happen. It is, however, important to take note of and be aware of all possibilities for the future and be prepared for the consequences of anything that may happen. After all, as traders we should all be doing that anyway! Please feel free to email me your own feelings on the CFTC proposal.

Until next time,

Sam Evans sevans@tradingacademy.com

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