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Leverage reducing begins

  • #21
  • May 7, 2009 12:57pm May 7, 2009 12:57pm
and why would you want that additional money in your forex account? actually that $2,000 in your account would be fine with 1,000:1 as you have 190 pips to play with and your remaining $8,000 is sitting in your safe FDIC insured bank ready to get wired into your account if the need were to arise. so it is changing your risk there cause if your broker goes belly up you lose only the $2,000 and not the whole $10,000 ....


Quoting pipmutt
Right, so having that much leverage available only changes your margin requirement, it's not changing your risk?

It hard to do the next bit and keep to my word, I'm not finding fault, honest!

Why would you need that additional free margin if risk isn't increased?

For example say you had $10k in your account and were an aggressive trader risking 5% per trade with a 50 pips stop. Like you say a 100k trade at 50:1 would be 2k margin, and $100 at 1000:1. Why do you need to have that additional free margin, there's plenty available for that trade...
  • #22
  • May 7, 2009 1:04pm May 7, 2009 1:04pm
Quoting mofuniverse
and why would you want that additional money in your forex account? actually that $2,000 in your account would be fine with 1,000:1 as you have 190 pips to play with and your remaining $8,000 is sitting in your safe FDIC insured bank ready to get wired into your account if the need were to arise. so it is changing your risk there cause if your broker goes belly up you lose only the $2,000 and not the whole $10,000 ....
Right, I was forgetting you're in US, I'm in UK so we're covered up to GBP50k regardless of what happens to the broker.

Maybe they'll bring FX into line with other markets as far as deposit protection, I agree one without the other would be unfair.
  • #23
  • May 7, 2009 1:06pm May 7, 2009 1:06pm
yeah im just one that likes to keep his risk to the minimum at every level

Quoting pipmutt
Right, I was forgetting you're in US, I'm in UK so we're covered up to GBP50k regardless of what happens to the broker.

Maybe they'll bring FX into line with other markets as far as deposit protection, I agree one without the other would be unfair.
  • #24
  • May 12, 2009 11:33pm May 12, 2009 11:33pm
Just heard about this today and agree wholeheartedly. I'm using CMS, and can say that this move is good for me as it will force me to start trading minis, (which is what I should have been doing from the start). A lot of the money I lost was due to erratic trading of multiple standard lots.

This is a wake-up call to beginners, (who think they can get rich quick in this market), that their main focus should be risk management.
  • #25
  • May 13, 2009 3:14am May 13, 2009 3:14am
People who knows Gambling Theory knows that lowering Leverage is good for the house.

In casinos, there is one rule called Minimum Bet and Maximum Bet. the Maximum Bet is usually 10x the Minimum only. Why? This discourages people from doubling up. Casinos know that "sometimes" people do get lucky and would double up.

Some would think this lowered Leverage is good; some say its good only for the broker. The way i see it, it forces me to put more money into my account. The more money we have in the broker, the more money is potentially in danger. Think about it that way instead.
  • #26
  • May 13, 2009 6:54am May 13, 2009 6:54am
Quoting ragnakore
People who knows Gambling Theory knows that lowering Leverage is good for the house.

In casinos, there is one rule called Minimum Bet and Maximum Bet. the Maximum Bet is usually 10x the Minimum only. Why? This discourages people from doubling up. Casinos know that "sometimes" people do get lucky and would double up.

Some would think this lowered Leverage is good; some say its good only for the broker. The way i see it, it forces me to put more money into my account. The more money we have in the broker, the more money is potentially in danger....

I am pretty sure that brokers ar enot happy with the new NFA rule. They are aware that some of their clients will leave and go to uk. I agree with you that now there is less risk for the broker, but if broker stp all of their clients trades and has sufficient credit lines with their LP's then leverage shouldnt be an issue.
  • #27
  • May 13, 2009 5:45pm May 13, 2009 5:45pm
As has been stated several times. The issue isn't risk management.

The issue is having to drop money in non insured broker accounts or to liquidate stable investments just to trade with.
  • #28
  • Edited May 17, 2009 2:04am May 16, 2009 8:58pm | Edited May 17, 2009 2:04am
Quoting ragnakore
People who knows Gambling Theory knows that lowering Leverage is good for the house.

In casinos, there is one rule called Minimum Bet and Maximum Bet. the Maximum Bet is usually 10x the Minimum only. Why? This discourages people from doubling up. Casinos know that "sometimes" people do get lucky and would double up.
For a casino that's relevant because anough people just come in and gamble a few times and leave, so if they score like that the casino might suffer - though still long term and many people later it'll come out on top. With fx people don't just make a couple of trades and leave.

Beyond that, there's no "house" in fx, not NFA or anyone else and brokers themselves would prefer people being able to trade more.
Quoting ragnakore
Some would think this lowered Leverage is good; some say its good only for the broker. The way i see it, it forces me to put more money into my account. The more money we have in the broker, the more money is potentially in danger. Think about it that way instead.
True, it's the main issue discussed here. But as I see it - it's a relativity issue: If you allow max leverage of 10 then definetly it's a problem. But, here we're talking about 100. Now as I see it, there's no need whatsoever to trade above THAT. All it gives you typically is less than 100 pips. Below that isn't even worth it in terms of wasting time and paying money transfer/account funding fees each time and also could create problems if there's suddenly great volatility/requotes and so on. Really, why would anyone need more than 100:1 ?

EDIT: To be more precise though, the max leverage of course can't be traded and what I put above as "less than 100" is actually a lot less if you want say a 100 pip max sl - max leverage is 50 and half is taken up by the margin. So I suppose 100 total is a bit low and restricting indeed. Should be about 200 as a reasonable max.
On the path to Enrichment.
  • #29
  • May 26, 2009 11:25pm May 26, 2009 11:25pm
I believe NFA must be receiving either monthly or yearly reports from fx brokerage firm on how well traders are doing with their trading accounts. From the statistic gathered, it must have been both obvious and shocking for them to see that more than 90% of those accounts must have blown up in smithereen due to overleveraging in some crazy martingale foolish trading. So in preventing account from blowing up in some senseless way which generates negative appearance and publicity, their first inclination would be to lower the leverage available making martingale like trading obsolete. In this process, there is also the automatic elimination going to take place which I believe is their secondary intention that is to filtering out small inexperience traders leaving the seasoned professional in tact - traders with good track record having laser like entry and perfect exit. But on the flip side, they have greatly increased the need of capital having to be tie up in an uninsued brokerage firm. So are they doing any good to protect trader? Yes and also no.
  • #30
  • Last Post: Edited 6:15am May 27, 2009 5:57am | Edited 6:15am
If they are so desperate to protect the trader, they should

A. Publish the #s they are getting from the brokers. Basically say, this is how much people lose when they use this kind of leverage.

B. Consider some kind of apprentice/master program for trading. You're not allowed to use leverage until you have X months of experience trading X amount of volume at a certain level. For B though they must grandfather all current traders in at the master level.

Also, it's not just a big deposits with uninsured brokers. It's also capital gains.

For example, let's say I have 500K in FSLR that I've made over 500K in profit on and I don't want to cash that stock in to withdraw that money to put in some dumb uninsured broker acct. Because when I do, I have to pay capital gains on all of it. I'd rather continue to let the money grow because I believe FSLR will do just fine.

Or let's say I live in a house that is worth 2Mio, or have a business that is worth 5mio, but can't really withdraw from those assets without going through a major hassle.

If I put 1000 in a 100x leveraged acct, this isn't the end of the world for me if I blow the account. I'd feel a little silly, but hey. Much less riskier than ripping my life apart to put 100K of real money in that account. Also, note the inherent money management that occurs because of this.

What reduced leveraging will do is weed out the smaller / more innovative brokers as nobody will risk dropping significant money in their accounts with them and giving them a try.

Perhaps the NFA thinks this is a good idea - they are wrong. The more brokers, the more competition we have, the better evolution in services. What the NFA needs to do is create more transparency if they want to help traders. Give us more visibility into what the brokers are doing / providing and then let the market decide.

Another possibility is that the numbers may look bad, but in reality, they aren't. People are only losing what they can afford to lose.

Finally, there is the possibility that the NFA is just carrying water for the institutional traders who are getting tired of having to trade against extremely intelligent highly leveraged indie traders, so they're backdooring us all via the NFA.

Cheers,

Tim.
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