By Danielle Franklin – In the past, compared to other investment options like stocks and options, forex trading had been rather unregulated. Recently, there have been lots of talks, rumors and opinions about the proposed changes to forex trading in US by Commodities Futures Trading Commissions (in other words CFTC). What does it all mean? How can this affect you? Is it a good time to change your broker?
Let us first look at what exactly is included in those panic-creating adjustments:
1. Forex Brokers would be required to register with CFTC as “retail foreign exchange dealers”.
2. Brokers would have to possess a certain capital to minimize the chance of broker bankruptcy.
3. Introducing brokers would be required to agree to exclusive contracts with the dealers.
4. Last, but not least, the worst case scenario – the minimization of the leverage option to 10:1.
Despite the fact that the potential regulation is likely to benefit the traders, since CFTC’s watchful eye over brokers will surely minimize fraud, based on the reaction from industry insiders and traders themselves, the majority are opposed to the new proposal. Most traders are planning to, if not already done so, switch to overseas brokers.
Why do US traders turn to off-shore brokers?
Let’s recall The NFA regulatory hammer in 2008, which lead to a serious drop in the number of forex brokers operating in US. The lack of choice and forceful unnecessary leverage minimization will force all US traders to move the account offshore. To make things worse, just like with online casinos, the government will most likely to figure out the way to stop US-based traders from trading offshore either.
What does the limit of margin actually mean?
The current leverage standard is 1:100, meaning that a trader borrows 100 times as much money as he/she actually invests in trading. Those who aren’t closely familiar with forex trading, link it directly gambling, however, US retail forex is not what it used to be few years ago.
If forex is a casino, what is next? Maybe we should add commodities and stock exchanges to gambling category as well! Forex is not gambling – it is trading one currency for another. There are economic, political and governmental factors that influence the market movements. Currencies are the basis that holds together the whole trading system – this is much more sophisticated than putting down chips on the random number and waiting for the roulette wheel to give you a random answer.
What can you possibly do with 10:1 leverage? Nothing! Seems like the attempt to drastically raise margin is a transparent effort to wipe off retail forex. After all, this is the only way an regular trader like you and I can stay in the game.
We all need 100:1 leverage accounts. This is the only way not only to trade and earn, but also to risk less, since the beginners can learn and practice with smaller accounts.
If government is so desperately hunting down gambling, how come they do not regulate Las Vegas instead? I mean, people lose much larger sums of money in one game of blackjack, for example.
As you can see, it has nothing to do with the gambling. It is all about who is getting the money. In case of Las Vegas, the money stays in States. In case of forex brokers (similar to online casinos), the money is floating out, which is, of course, uncomfortable for the country leaders.
The point is that irresponsible, impulsive traders will blow up their account no matter what margin they choose – 400:1, 100:1, 10:1 or even less. Leverage doesn’t matter when a trader doesn’t know how to minimize the risks and manage the money. The only way to become a professional trader is to learn the market, follow the plan, stay disciplined or otherwise invest in something else!
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