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?
Should You Trade Market Cycle Systems? | Trading Forex
You might have heard that this is a great year to buy American stocks, because this is a Presidential election year. After all, it is absolutely true that in every American Presidential election year since 1928, only 4 out of those 21 years saw a negative performance by the S&P 500 Index or its equivalent. Does that sound good? These kinds of systems have many names but are most commonly known as market cycle systems. It is worth considering carefully whether they are ever worth following.
What is the System’s Logic?
The first thing to ask yourself when considering such a system is whether the logic behind the system is compelling. There are market cycle systems based upon lunar cycles. Before you laugh, you might want to consider the fact the senior police officers have gone on record saying they feel there is more violent crime on full moon nights. However, rigorous surveys have found no significant lunar influences on human behavior with the possible exception of sleep cycles.Possibly a more intellectually compelling case can be made for buying stocks in a Presidential election year. The logic presumably goes like this: a President wants to get re-elected, or wants their preferred and associated candidate to win, and so the administration does what they can to generate an economic boom, which drives up the stock market, and which is designed to end as soon as the polls close.
This could be a plausible argument, although there are several serious flaws in it, such as the independence of the Federal Reserve. However, even if you did find the evidence compelling, you have to move to the second step, which is to take a much closer and critical look at the data supporting the market cycle system’s case.
Checking the System’s Data
We saw that 17 out of 21 years in the sample produced positive performances in the case of the Presidential election year stock-buying system. This sounds pretty good: a win rate of almost 81%.The first question to ask is how this compares to ALL of the years since 1928. Twenty-four of these sixty years produced negative returns, which means that 60% of all the years were winners. Now while 81% seems greatly superior to 60%, we have to bear in mind that statistically sixty is a much better sample than twenty-four. In fact, samples under two hundred tend to be very unreliable statistically. So for reasons of simple statistics, you should be very wary of risking money on a system that has only twenty-four sample points, especially when the result seems not so very different from a typical year! Ideally, you want something that has been tested over many years with thousands of samples in a wide range of market conditions, backed by a very strong intellectual logic.
Another aspect of the data in our Presidential election year system that is worth taking a closer look at is the average return, not just the proportion of years giving some kind of positive return. The average return is 9.45%. As it happens, the average annual return from 1928 to 2015 was 11.41%. So even assuming a mere twenty-four data points are acceptable, just by taking a closer look at the data we can see this system is not all it is cracked up to be.
Compelling and Effective Market Cycle Systems
If you are going to seek to trade this type of system, you want to use something that has been well researched and has a lot of supporting data behind it. There are a few well-known examples.First of all, there are several academic studies showing that a “momentum” effect exists in speculative financial markets such as stocks, commodities and Forex. This means that if the price of something has been going up or down over a period of months, then over the next few weeks it is more likely than not to continue in the same direction. This is also known as “trend following”, and the statistical truth of such market cycle systems has been established over hundreds of years in all markets using tens of thousands of samples.
The most successful Forex trend trading strategies have focused on trading USD pairs only where prices have moved in the same direction over the previous three and six month periods.
Less well-known systems exploit the “Monday effect” in stock markets, where stocks tend to rise excessively on Mondays, by buying stocks on Monday mornings in rising markets.
In Forex, my own research shows that swing and position trades in USD currency pairs are a little more profitable where trades are entered on Monday, right at the beginning of the week, or right at the end of the week on Friday, as shown in the chart below. The study was conducted over the last 14 years just entering on H4 charts after deep pullbacks began to reverse back into the direction of 3 month and 6 months trends, using the major USD pairs. The numbers are average expectancy by reward to risk ratio. We can see the more immediate rewards were superior on Mondays and Fridays. Excessive returns are highlighted in yellow:
One reason for this in the Forex market could be the triple overnight interest which is charged or paid (usually charged) by Forex brokers on Wednesday night in the middle of the week.
The “Friday effect” is not so well known, but has been observed to work in strong trends in the Forex market, exploiting the fact that many traders are frightened to hold positions over the weekend when they cannot be exited as brokerages are closed and usually will not honor stop losses triggered during weekend hours.
Conclusion
If you are going to trade market cycle systems, do make sure they are well-supported by statistical research, and that they are based upon common sense.Source
Should You Trade Market Cycle Systems? | Trading Forex
You might have heard that this is a great year to buy American stocks, because this is a Presidential election year. After all, it is absolutely true that in every American Presidential election year since 1928, only 4 out of those 21 years saw a negative performance by the S&P 500 Index or its equivalent. Does that sound good? These kinds of systems have many names but are most commonly known as market cycle systems. It is worth considering carefully whether they are ever worth following.
What is the System’s Logic?
The first thing to ask yourself when considering such a system is whether the logic behind the system is compelling. There are market cycle systems based upon lunar cycles. Before you laugh, you might want to consider the fact the senior police officers have gone on record saying they feel there is more violent crime on full moon nights. However, rigorous surveys have found no significant lunar influences on human behavior with the possible exception of sleep cycles.Possibly a more intellectually compelling case can be made for buying stocks in a Presidential election year. The logic presumably goes like this: a President wants to get re-elected, or wants their preferred and associated candidate to win, and so the administration does what they can to generate an economic boom, which drives up the stock market, and which is designed to end as soon as the polls close.
This could be a plausible argument, although there are several serious flaws in it, such as the independence of the Federal Reserve. However, even if you did find the evidence compelling, you have to move to the second step, which is to take a much closer and critical look at the data supporting the market cycle system’s case.
Checking the System’s Data
We saw that 17 out of 21 years in the sample produced positive performances in the case of the Presidential election year stock-buying system. This sounds pretty good: a win rate of almost 81%.The first question to ask is how this compares to ALL of the years since 1928. Twenty-four of these sixty years produced negative returns, which means that 60% of all the years were winners. Now while 81% seems greatly superior to 60%, we have to bear in mind that statistically sixty is a much better sample than twenty-four. In fact, samples under two hundred tend to be very unreliable statistically. So for reasons of simple statistics, you should be very wary of risking money on a system that has only twenty-four sample points, especially when the result seems not so very different from a typical year! Ideally, you want something that has been tested over many years with thousands of samples in a wide range of market conditions, backed by a very strong intellectual logic.
Another aspect of the data in our Presidential election year system that is worth taking a closer look at is the average return, not just the proportion of years giving some kind of positive return. The average return is 9.45%. As it happens, the average annual return from 1928 to 2015 was 11.41%. So even assuming a mere twenty-four data points are acceptable, just by taking a closer look at the data we can see this system is not all it is cracked up to be.
Compelling and Effective Market Cycle Systems
If you are going to seek to trade this type of system, you want to use something that has been well researched and has a lot of supporting data behind it. There are a few well-known examples.First of all, there are several academic studies showing that a “momentum” effect exists in speculative financial markets such as stocks, commodities and Forex. This means that if the price of something has been going up or down over a period of months, then over the next few weeks it is more likely than not to continue in the same direction. This is also known as “trend following”, and the statistical truth of such market cycle systems has been established over hundreds of years in all markets using tens of thousands of samples.
The most successful Forex trend trading strategies have focused on trading USD pairs only where prices have moved in the same direction over the previous three and six month periods.
Less well-known systems exploit the “Monday effect” in stock markets, where stocks tend to rise excessively on Mondays, by buying stocks on Monday mornings in rising markets.
In Forex, my own research shows that swing and position trades in USD currency pairs are a little more profitable where trades are entered on Monday, right at the beginning of the week, or right at the end of the week on Friday, as shown in the chart below. The study was conducted over the last 14 years just entering on H4 charts after deep pullbacks began to reverse back into the direction of 3 month and 6 months trends, using the major USD pairs. The numbers are average expectancy by reward to risk ratio. We can see the more immediate rewards were superior on Mondays and Fridays. Excessive returns are highlighted in yellow:
One reason for this in the Forex market could be the triple overnight interest which is charged or paid (usually charged) by Forex brokers on Wednesday night in the middle of the week.
The “Friday effect” is not so well known, but has been observed to work in strong trends in the Forex market, exploiting the fact that many traders are frightened to hold positions over the weekend when they cannot be exited as brokerages are closed and usually will not honor stop losses triggered during weekend hours.
Conclusion
If you are going to trade market cycle systems, do make sure they are well-supported by statistical research, and that they are based upon common sense.Source
Should You Trade Market Cycle Systems? | Trading Forex
You might have heard that this is a great year to buy American stocks, because this is a Presidential election year. After all, it is absolutely true that in every American Presidential election year since 1928, only 4 out of those 21 years saw a negative performance by the S&P 500 Index or its equivalent. Does that sound good? These kinds of systems have many names but are most commonly known as market cycle systems. It is worth considering carefully whether they are ever worth following.
What is the System’s Logic?
The first thing to ask yourself when considering such a system is whether the logic behind the system is compelling. There are market cycle systems based upon lunar cycles. Before you laugh, you might want to consider the fact the senior police officers have gone on record saying they feel there is more violent crime on full moon nights. However, rigorous surveys have found no significant lunar influences on human behavior with the possible exception of sleep cycles.Possibly a more intellectually compelling case can be made for buying stocks in a Presidential election year. The logic presumably goes like this: a President wants to get re-elected, or wants their preferred and associated candidate to win, and so the administration does what they can to generate an economic boom, which drives up the stock market, and which is designed to end as soon as the polls close.
This could be a plausible argument, although there are several serious flaws in it, such as the independence of the Federal Reserve. However, even if you did find the evidence compelling, you have to move to the second step, which is to take a much closer and critical look at the data supporting the market cycle system’s case.
Checking the System’s Data
We saw that 17 out of 21 years in the sample produced positive performances in the case of the Presidential election year stock-buying system. This sounds pretty good: a win rate of almost 81%.The first question to ask is how this compares to ALL of the years since 1928. Twenty-four of these sixty years produced negative returns, which means that 60% of all the years were winners. Now while 81% seems greatly superior to 60%, we have to bear in mind that statistically sixty is a much better sample than twenty-four. In fact, samples under two hundred tend to be very unreliable statistically. So for reasons of simple statistics, you should be very wary of risking money on a system that has only twenty-four sample points, especially when the result seems not so very different from a typical year! Ideally, you want something that has been tested over many years with thousands of samples in a wide range of market conditions, backed by a very strong intellectual logic.
Another aspect of the data in our Presidential election year system that is worth taking a closer look at is the average return, not just the proportion of years giving some kind of positive return. The average return is 9.45%. As it happens, the average annual return from 1928 to 2015 was 11.41%. So even assuming a mere twenty-four data points are acceptable, just by taking a closer look at the data we can see this system is not all it is cracked up to be.
Compelling and Effective Market Cycle Systems
If you are going to seek to trade this type of system, you want to use something that has been well researched and has a lot of supporting data behind it. There are a few well-known examples.First of all, there are several academic studies showing that a “momentum” effect exists in speculative financial markets such as stocks, commodities and Forex. This means that if the price of something has been going up or down over a period of months, then over the next few weeks it is more likely than not to continue in the same direction. This is also known as “trend following”, and the statistical truth of such market cycle systems has been established over hundreds of years in all markets using tens of thousands of samples.
The most successful Forex trend trading strategies have focused on trading USD pairs only where prices have moved in the same direction over the previous three and six month periods.
Less well-known systems exploit the “Monday effect” in stock markets, where stocks tend to rise excessively on Mondays, by buying stocks on Monday mornings in rising markets.
In Forex, my own research shows that swing and position trades in USD currency pairs are a little more profitable where trades are entered on Monday, right at the beginning of the week, or right at the end of the week on Friday, as shown in the chart below. The study was conducted over the last 14 years just entering on H4 charts after deep pullbacks began to reverse back into the direction of 3 month and 6 months trends, using the major USD pairs. The numbers are average expectancy by reward to risk ratio. We can see the more immediate rewards were superior on Mondays and Fridays. Excessive returns are highlighted in yellow:
One reason for this in the Forex market could be the triple overnight interest which is charged or paid (usually charged) by Forex brokers on Wednesday night in the middle of the week.
The “Friday effect” is not so well known, but has been observed to work in strong trends in the Forex market, exploiting the fact that many traders are frightened to hold positions over the weekend when they cannot be exited as brokerages are closed and usually will not honor stop losses triggered during weekend hours.
Conclusion
If you are going to trade market cycle systems, do make sure they are well-supported by statistical research, and that they are based upon common sense.Source
Should You Trade Market Cycle Systems? | Trading Forex
You might have heard that this is a great year to buy American stocks, because this is a Presidential election year. After all, it is absolutely true that in every American Presidential election year since 1928, only 4 out of those 21 years saw a negative performance by the S&P 500 Index or its equivalent. Does that sound good? These kinds of systems have many names but are most commonly known as market cycle systems. It is worth considering carefully whether they are ever worth following.
What is the System’s Logic?
The first thing to ask yourself when considering such a system is whether the logic behind the system is compelling. There are market cycle systems based upon lunar cycles. Before you laugh, you might want to consider the fact the senior police officers have gone on record saying they feel there is more violent crime on full moon nights. However, rigorous surveys have found no significant lunar influences on human behavior with the possible exception of sleep cycles.Possibly a more intellectually compelling case can be made for buying stocks in a Presidential election year. The logic presumably goes like this: a President wants to get re-elected, or wants their preferred and associated candidate to win, and so the administration does what they can to generate an economic boom, which drives up the stock market, and which is designed to end as soon as the polls close.
This could be a plausible argument, although there are several serious flaws in it, such as the independence of the Federal Reserve. However, even if you did find the evidence compelling, you have to move to the second step, which is to take a much closer and critical look at the data supporting the market cycle system’s case.
Checking the System’s Data
We saw that 17 out of 21 years in the sample produced positive performances in the case of the Presidential election year stock-buying system. This sounds pretty good: a win rate of almost 81%.The first question to ask is how this compares to ALL of the years since 1928. Twenty-four of these sixty years produced negative returns, which means that 60% of all the years were winners. Now while 81% seems greatly superior to 60%, we have to bear in mind that statistically sixty is a much better sample than twenty-four. In fact, samples under two hundred tend to be very unreliable statistically. So for reasons of simple statistics, you should be very wary of risking money on a system that has only twenty-four sample points, especially when the result seems not so very different from a typical year! Ideally, you want something that has been tested over many years with thousands of samples in a wide range of market conditions, backed by a very strong intellectual logic.
Another aspect of the data in our Presidential election year system that is worth taking a closer look at is the average return, not just the proportion of years giving some kind of positive return. The average return is 9.45%. As it happens, the average annual return from 1928 to 2015 was 11.41%. So even assuming a mere twenty-four data points are acceptable, just by taking a closer look at the data we can see this system is not all it is cracked up to be.
Compelling and Effective Market Cycle Systems
If you are going to seek to trade this type of system, you want to use something that has been well researched and has a lot of supporting data behind it. There are a few well-known examples.First of all, there are several academic studies showing that a “momentum” effect exists in speculative financial markets such as stocks, commodities and Forex. This means that if the price of something has been going up or down over a period of months, then over the next few weeks it is more likely than not to continue in the same direction. This is also known as “trend following”, and the statistical truth of such market cycle systems has been established over hundreds of years in all markets using tens of thousands of samples.
The most successful Forex trend trading strategies have focused on trading USD pairs only where prices have moved in the same direction over the previous three and six month periods.
Less well-known systems exploit the “Monday effect” in stock markets, where stocks tend to rise excessively on Mondays, by buying stocks on Monday mornings in rising markets.
In Forex, my own research shows that swing and position trades in USD currency pairs are a little more profitable where trades are entered on Monday, right at the beginning of the week, or right at the end of the week on Friday, as shown in the chart below. The study was conducted over the last 14 years just entering on H4 charts after deep pullbacks began to reverse back into the direction of 3 month and 6 months trends, using the major USD pairs. The numbers are average expectancy by reward to risk ratio. We can see the more immediate rewards were superior on Mondays and Fridays. Excessive returns are highlighted in yellow:
One reason for this in the Forex market could be the triple overnight interest which is charged or paid (usually charged) by Forex brokers on Wednesday night in the middle of the week.
The “Friday effect” is not so well known, but has been observed to work in strong trends in the Forex market, exploiting the fact that many traders are frightened to hold positions over the weekend when they cannot be exited as brokerages are closed and usually will not honor stop losses triggered during weekend hours.
Conclusion
If you are going to trade market cycle systems, do make sure they are well-supported by statistical research, and that they are based upon common sense.Source
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