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?
Trading Crude Oil Correlations | Trading Forex
A little over one year ago, I wrote an article about how to trade crude oil, as there was a lot of interest in this primary energy commodity instrument at the time. There is again a lot of interest, and these days a lot of Forex brokers also offer trading in crude oil. Whenever retail interest peaks, I become concerned, because trading crude oil when you are used to only trading Forex is an easy way to blow your account.
In that article, I wrote about how it is important to trade with the trend and not pick tops and bottoms if you want to have the best chance of survival and profit. Ironically, when I wrote the article, prices were at a very long-term low, close to $26 per barrel. The price reached $26 per barrel and then simply took off, almost doubling in value in less than four months! So, in this instance I was wrong to say that “prices don’t just turn”, sometimes they do, but it is extremely challenging to identify in advance when they will with an acceptable rate of accuracy.
Going back to basics, if you are thinking of starting to trade crude oil and you are new to it, there are a few major pitfalls you should be aware of first, and some ways to best avoid them.
Crude Oil Pitfalls
Crude oil is very, very volatile, much more volatile than Forex currency pairs. For this reason, most brokers enforce a considerably lower maximum true leverage on crude oil trades compared to Forex currency pairs. Even though brokers and regulators are doing a little something to try to save you from blowing up, you still have a lot of work to do because the minimum position size you can take in crude oil is usually much larger than in a Forex currency pair too.
For example, let’s compare the positively correlated USD/CAD Forex currency pair (more on that later) with crude oil. Most Forex brokers will allow you to buy or sell only $1,000 worth of Canadian dollars, but the minimum transaction size for crude oil is often about five times higher, at the current market price (100 barrels of oil at roughly $50 per barrel). True enough, there are an increasing number of brokers allowing a minimum size of only 10 barrels of oil per trade, and if you are lucky enough to find one, this problem almost goes away. 
The next issue is the high volatility of crude oil. Over an average week between 2001 and 2014, the price ranged by 7.28%. Compared to the same value exhibited by the USD/CAD Forex currency pair, which was 1.92%, the volatility was almost 3.8 times as great. Just to show that these values were not overly distorted by outliers, the respective median values were 6.38% and 1.69%. So, you can see why, when trading crude oil, you are going to need much wider stop losses than you will with Forex, and so the volatility-adjusted minimum effective position size in crude oil becomes greater than the corresponding Forex value.
Finally, in long-term trades, crude oil often carries higher overnight financing charges than the Canadian dollar.
Substituting Crude oil for the Canadian Dollar
I mentioned earlier that there is a correlation between the prices of the Canadian dollar and crude oil. Using the same weekly historical data discussed previously, there is a correlation coefficient between the two of 0.34. This is a reasonably high level of correlation considering the high time frame used in the calculation (weekly) and the 13-year back test period. That means that the prices tend to move the same way, which is not surprising, as Canada is a major oil producer (ranked 5th in the world) and exporter (ranked 4th in the world). There are only two countries with larger known oil reserves than Canada. These facts make the “Loonie” (as the Canadian dollar is widely known) a major “petro-currency” whose relatively value is highly dependent upon the price of oil.
This means that if you are reluctant or unable to trade crude oil directly, for whatever reason, you could consider using the Canadian dollar as a substitute, with the USD/CAD pair being the obvious choice as the pairing is with the U.S. dollar, the same way crude oil is traded in U.S. dollars.
Correlation Trading
The relatively high correlation offers more opportunity than substitution: it can also be a basis for trading strategies. If we assume that the correlation is due to the price of crude oil acting as a kind of leading indicator of the future price of the Canadian dollar, then we could wait for oil to get significantly ahead or behind and be ready to trade the Canadian dollar in the same direction.
Another possible related opportunity lies in waiting for any significant divergence between the price movements of crude oil and the Canadian dollar, then taking equally weighted positions (by volatility measured by a long-term Average True Range value) in each instrument in the direction of their convergence. Divergence is usually most easily measured by using the same long-term moving average on charts of the same time frame for each pair.
Source
Trading Crude Oil Correlations | Trading Forex
A little over one year ago, I wrote an article about how to trade crude oil, as there was a lot of interest in this primary energy commodity instrument at the time. There is again a lot of interest, and these days a lot of Forex brokers also offer trading in crude oil. Whenever retail interest peaks, I become concerned, because trading crude oil when you are used to only trading Forex is an easy way to blow your account.
In that article, I wrote about how it is important to trade with the trend and not pick tops and bottoms if you want to have the best chance of survival and profit. Ironically, when I wrote the article, prices were at a very long-term low, close to $26 per barrel. The price reached $26 per barrel and then simply took off, almost doubling in value in less than four months! So, in this instance I was wrong to say that “prices don’t just turn”, sometimes they do, but it is extremely challenging to identify in advance when they will with an acceptable rate of accuracy.
Going back to basics, if you are thinking of starting to trade crude oil and you are new to it, there are a few major pitfalls you should be aware of first, and some ways to best avoid them.
Crude Oil Pitfalls
Crude oil is very, very volatile, much more volatile than Forex currency pairs. For this reason, most brokers enforce a considerably lower maximum true leverage on crude oil trades compared to Forex currency pairs. Even though brokers and regulators are doing a little something to try to save you from blowing up, you still have a lot of work to do because the minimum position size you can take in crude oil is usually much larger than in a Forex currency pair too.
For example, let’s compare the positively correlated USD/CAD Forex currency pair (more on that later) with crude oil. Most Forex brokers will allow you to buy or sell only $1,000 worth of Canadian dollars, but the minimum transaction size for crude oil is often about five times higher, at the current market price (100 barrels of oil at roughly $50 per barrel). True enough, there are an increasing number of brokers allowing a minimum size of only 10 barrels of oil per trade, and if you are lucky enough to find one, this problem almost goes away.
The next issue is the high volatility of crude oil. Over an average week between 2001 and 2014, the price ranged by 7.28%. Compared to the same value exhibited by the USD/CAD Forex currency pair, which was 1.92%, the volatility was almost 3.8 times as great. Just to show that these values were not overly distorted by outliers, the respective median values were 6.38% and 1.69%. So, you can see why, when trading crude oil, you are going to need much wider stop losses than you will with Forex, and so the volatility-adjusted minimum effective position size in crude oil becomes greater than the corresponding Forex value.
Finally, in long-term trades, crude oil often carries higher overnight financing charges than the Canadian dollar.
Substituting Crude oil for the Canadian Dollar
I mentioned earlier that there is a correlation between the prices of the Canadian dollar and crude oil. Using the same weekly historical data discussed previously, there is a correlation coefficient between the two of 0.34. This is a reasonably high level of correlation considering the high time frame used in the calculation (weekly) and the 13-year back test period. That means that the prices tend to move the same way, which is not surprising, as Canada is a major oil producer (ranked 5th in the world) and exporter (ranked 4th in the world). There are only two countries with larger known oil reserves than Canada. These facts make the “Loonie” (as the Canadian dollar is widely known) a major “petro-currency” whose relatively value is highly dependent upon the price of oil.
This means that if you are reluctant or unable to trade crude oil directly, for whatever reason, you could consider using the Canadian dollar as a substitute, with the USD/CAD pair being the obvious choice as the pairing is with the U.S. dollar, the same way crude oil is traded in U.S. dollars.
Correlation Trading
The relatively high correlation offers more opportunity than substitution: it can also be a basis for trading strategies. If we assume that the correlation is due to the price of crude oil acting as a kind of leading indicator of the future price of the Canadian dollar, then we could wait for oil to get significantly ahead or behind and be ready to trade the Canadian dollar in the same direction.
Another possible related opportunity lies in waiting for any significant divergence between the price movements of crude oil and the Canadian dollar, then taking equally weighted positions (by volatility measured by a long-term Average True Range value) in each instrument in the direction of their convergence. Divergence is usually most easily measured by using the same long-term moving average on charts of the same time frame for each pair.
Source
Trading Crude Oil Correlations | Trading Forex
A little over one year ago, I wrote an article about how to trade crude oil, as there was a lot of interest in this primary energy commodity instrument at the time. There is again a lot of interest, and these days a lot of Forex brokers also offer trading in crude oil. Whenever retail interest peaks, I become concerned, because trading crude oil when you are used to only trading Forex is an easy way to blow your account.
In that article, I wrote about how it is important to trade with the trend and not pick tops and bottoms if you want to have the best chance of survival and profit. Ironically, when I wrote the article, prices were at a very long-term low, close to $26 per barrel. The price reached $26 per barrel and then simply took off, almost doubling in value in less than four months! So, in this instance I was wrong to say that “prices don’t just turn”, sometimes they do, but it is extremely challenging to identify in advance when they will with an acceptable rate of accuracy.
Going back to basics, if you are thinking of starting to trade crude oil and you are new to it, there are a few major pitfalls you should be aware of first, and some ways to best avoid them.
Crude Oil Pitfalls
Crude oil is very, very volatile, much more volatile than Forex currency pairs. For this reason, most brokers enforce a considerably lower maximum true leverage on crude oil trades compared to Forex currency pairs. Even though brokers and regulators are doing a little something to try to save you from blowing up, you still have a lot of work to do because the minimum position size you can take in crude oil is usually much larger than in a Forex currency pair too.
For example, let’s compare the positively correlated USD/CAD Forex currency pair (more on that later) with crude oil. Most Forex brokers will allow you to buy or sell only $1,000 worth of Canadian dollars, but the minimum transaction size for crude oil is often about five times higher, at the current market price (100 barrels of oil at roughly $50 per barrel). True enough, there are an increasing number of brokers allowing a minimum size of only 10 barrels of oil per trade, and if you are lucky enough to find one, this problem almost goes away.
The next issue is the high volatility of crude oil. Over an average week between 2001 and 2014, the price ranged by 7.28%. Compared to the same value exhibited by the USD/CAD Forex currency pair, which was 1.92%, the volatility was almost 3.8 times as great. Just to show that these values were not overly distorted by outliers, the respective median values were 6.38% and 1.69%. So, you can see why, when trading crude oil, you are going to need much wider stop losses than you will with Forex, and so the volatility-adjusted minimum effective position size in crude oil becomes greater than the corresponding Forex value.
Finally, in long-term trades, crude oil often carries higher overnight financing charges than the Canadian dollar.
Substituting Crude oil for the Canadian Dollar
I mentioned earlier that there is a correlation between the prices of the Canadian dollar and crude oil. Using the same weekly historical data discussed previously, there is a correlation coefficient between the two of 0.34. This is a reasonably high level of correlation considering the high time frame used in the calculation (weekly) and the 13-year back test period. That means that the prices tend to move the same way, which is not surprising, as Canada is a major oil producer (ranked 5th in the world) and exporter (ranked 4th in the world). There are only two countries with larger known oil reserves than Canada. These facts make the “Loonie” (as the Canadian dollar is widely known) a major “petro-currency” whose relatively value is highly dependent upon the price of oil.
This means that if you are reluctant or unable to trade crude oil directly, for whatever reason, you could consider using the Canadian dollar as a substitute, with the USD/CAD pair being the obvious choice as the pairing is with the U.S. dollar, the same way crude oil is traded in U.S. dollars.
Correlation Trading
The relatively high correlation offers more opportunity than substitution: it can also be a basis for trading strategies. If we assume that the correlation is due to the price of crude oil acting as a kind of leading indicator of the future price of the Canadian dollar, then we could wait for oil to get significantly ahead or behind and be ready to trade the Canadian dollar in the same direction.
Another possible related opportunity lies in waiting for any significant divergence between the price movements of crude oil and the Canadian dollar, then taking equally weighted positions (by volatility measured by a long-term Average True Range value) in each instrument in the direction of their convergence. Divergence is usually most easily measured by using the same long-term moving average on charts of the same time frame for each pair.
Source
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