50:1 Leverage Limit – Industry is Growing Up

In less than a month, the new CFTC rule regarding foreign exchange will be in effect – a maximum leverage limit of 50:1 on majors and 20:1 on others. This might be frustrating for some traders, but in the long run, I believe this is a good step for industry.

I believe that a leverage limit of  50:1 should be sufficient for most traders. While the desired leverage for most traders is 100:1, 50:1 is good enough. For traders that were used to 100:1, this can help them with money management – they will risk a smaller portion of their account on every trade.

The original proposal was for a 10:1 limit. While serious traders can settle for this leverage, changing the limit from 100:1 to 10:1 in one day would be too drastic – a step that would definitely damage the industry and send traders elsewhere. And if they would have nowhere to go to, US traders would just abandon the industry.

The CFTC found a  good compromise between the will to distance forex from gambling and the understanding that a harsh 10:1 limit will create more damage. Together with a  50:1 limit in Japan (25:1 next year), regulation is slowly limiting the high leverage.

Leverage in forex is still high, but slowly becoming more acceptable for mainstream stock traders. Some “gamblers” might quit the forex, but tougher regulation can open the door to traders that saw foreign exchange as the “Wild West”.

I believe that this move by the CFTC is just part of the industry’s evolution.  I think that the majority of American traders will prefer to give up on higher leverage and stay with local and regulated brokers.

It will be interesting to see if other regulatory bodies, such as the British, Swiss and Australian bodies, will follow with this limit. If more Western countries apply such rules, traders will have two options: trusted but limited trading, or unregulated distant brokers. Currently, the US and Japan lead the pack.

Leverage is limited in the “safe haven” countries…

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