50:1 Leverage Limit – Industry is Growing Up

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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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About Author

Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned the significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.

40 Comments

  1. Pingback: Eurcad Technical Analysis | Winners Edge Trading

  2. I think that this is the end of the US FX brokerage industry, at least what concerns the retail brokerage whose customers will flee overseas. Say hello to further redundancies.

  3. Jonathan Hackman on

    50:1 leverage might be just fine but to have the Government make the change is NOT fine. This change was supposed to keep investors from big losses. I don’t see traders loosing their homes,cars,savings or jobs. If the Government was really watching out for the good of the citizen then lets regulate the gambling industry. The lower leverage will put fewer dollars into the overall market place..The result? Fewer dollars divided into the GDP = AAA credit so more $$ can be borrowed in January. The big pitcure= thousands of investors will have their incomes slashed 50% to 80% just so Obama(administration) can borrow more from China. USA and Japan lead the pack take a good look at the dollar and yen..now you know why they lead..Brokers should love the change..more traders..more pips for them..Sum it up..the middle class gets screwed again..

  4. BS dectector on

    You should not get drunk before writing a BS article like this one. Restricting the choices of USA traders is very bad business and not competitive with the rest of the world.

    And following the Japanase?!?! That’s like the USA being Lloyd in “Dumber and Dumber”.

  5. Jack Maverick on

    This rule is garbage. It doesn’t do anything to restrain the excesses of banks and other large traders – it only hamstrings small investors. The greatest thing about Forex trading is (or, excuse me, WAS) the ability to open a micro account with $50 or $100, and within one year be able to build yourself into someone who trades for a (good) living.
    Plus, as others noted, all this rule is really likely to accomplish is pushing traders out of U.S. brokerage firms – I personally moved all my trading accounts, except one, overseas when they first began talking about this nearly a year ago.

  6. Jack Maverick on

    This rule does absolutely NOTHING to help individual forex traders. It’s just more stupid government meddling.

  7. Sick and Tired One on

    50:1 is good,huh? Says who? You? Who are you to decide what is good for ME, you fu**ing busy bodies and your government bureaucrats.

  8. Jack Maverick on

    re:sick and tired’s comment
    Oh, great, now I’m breaking the law!
    ROFL
    The entire current federal government ought to be shot for treason – I would never have thought freedoms could disappear so quickly from the home of Miss Liberty. It’s a damned sad day in America.

  9. Jack Maverick on

    “I think that the majority of American traders will prefer to give up on higher leverage and stay with local and regulated brokers.”

    Actually, with the 20:1 on non-majors, I’ll bet my earnings for the rest of the year that thousands of traders simply abandon forex trading. I’m sure that, yes, the “majority” (over half – whoopee, what an accomplishment) will stay with U.S. brokerages, however, I know quite a number of traders who, like myself, have gone to greener pastures.

  10. Jack Maverick on

    “It will be interesting to see if other regulatory bodies, such as the British, Swiss and Australian bodies, will follow with this limit.”

    I don’t think the Brits will be quite so quick to shoot themselves in the foot, when by NOT following the U.S. they can generate millions in additional income for UK brokerage firms.

  11. Sick and Tired One on

    Jack, even if they do, there are always the Russians. They’ll be happy to take our money and stick it to the U.S by not complying with these idiotic restrictions. I for one am seriously considering removing myself from the U.S territory.

  12. Jack Maverick on

    Thanks for the article reference, Sick and Tired – which reminded me of another recent theft of liberty that, just like this, did NOTHING to in any way aid individual traders – the “no hedging” rule. I probably make 10-15% of my trading income by hedging long-term trades with short term trades. That rule – just like all the new ones – did nothing helpful for traders, just made earning a living in the U.S. more difficult.

  13. Jack Maverick on

    I am so upset by all these stupid regulations because of the fact that I have always loved forex for being the one investment arena where a “regular guy” could take a small amount of money and build himself a substantial stake of investment capital. All these new rules do is once again try to restrict profitable investing to only people who already HAVE a lot of money.

  14. Jack Maverick on

    S&T – Renunciations of U.S. citizenship reached record levels last year. Virtually anyone with the financial ability to relocate elsewhere is naturally eyeing the door. Yep – me, too – looking seriously at Argentina. I hate that it’s come to that, but on the other hand, I’m not going to stick around here and just wait for Uncle Sam to steal every damn dime I’ve made.

  15. Sick and Tired One on

    “All these new rules do is once again try to restrict profitable investing to only people who already HAVE a lot of money.”

    I don’t know… The government does what it does. It is against people, and it has became the ENEMY. That’s fine with me. But again, what makes me go ballistic, are people like the author of this article. The busy bodies, the do gooders the useful idiots that in their hate of Bush, gave us these traitors.

  16. Sick and Tired One on

    “Virtually anyone with the financial ability to relocate elsewhere is naturally eyeing the door. Yep – me, too – looking seriously at Argentina. I hate that it’s come to that, but on the other hand, I’m not going to stick around here and just wait for Uncle Sam to steal every damn dime I’ve made.”

    There’s a new question going around: What’s your back up country? I am all set up, as I have dual citizenship (and I’ll turn this one in if they push me hard enough).

    One thing I know. I’ll be drinking my whiskey while watching the riots in the street on TV. That will be fun.

  17. Jack Maverick on

    Bermuda – but not really for any other reason than I like it. 🙂
    I wonder if there are enough independent forex traders to do a march on Washington. 🙂

  18. Jack Maverick on

    Again, this just grates on me because I know so many people that have been able to create their own “home business” as forex traders, who could never have gotten started under these new regulations. So, basically, this whole thing is just another instance of the government stamping out every little spark of independent economic enterprise that they can.

  19. This rule is just another manifestation of living in a society predominantly populated and governed by idiots. As those commenting here are aware, this is a rule made by idiots to try to appease idiots because a bunch of idiots caused a whole lot of trouble and the idiots who could didn’t regulate THEM. So as a non-idiot, thanks very much idiots for dragging me down, once again, to the level of the lowest common denominator and into your moron zeitgeist in which you crawl around clueless, clutching at quasi-solutions like a baby at a dummy in a hurricane of cognitive impairment. And…this law is patronizing, paternalistic and popularist. As a sentient adult, I (that’s I) choose my leverage thank you. Butt out and write another moron speech for your idiots to analyse and fools to believe.

  20. ps. Yoyah, I’m not attacking you above, but your line on this is very pious golden boy and aiming to please – bordering on sactimonious. How is 50:1 leverage indicative of a maturing industry? I, like the majority of good forex traders, am mature and quite capable of handling 100:1 leverage. In fact, this decision is an immature knee jerk reaction, and we all know it. Call a spade a spade ok. And by the way, don’t do radio or interviews – it’s just not your thing. Sorry about saying so but you know, it’s just not. Brilliant site though! Cheers.

  21. Jack Maverick on

    Matt – Brilliant analysis. Yeah, the whole thing is unnecessary bullshit. There were plenty of laws and regulations already in place to prevent excesses and fraud that occurred on Wall Street – but they weren’t enforced! Unfortunately, in this ass-backwards world, THESE regulations WILL be enforced.

  22. Sick and Tired One on

    “There were plenty of laws and regulations already in place to prevent excesses and fraud that occurred on Wall Street – but they weren’t enforced”

    I can’t believe these clowns look at the government to protect us. Madoff did a 1B stunt right under the SEC nose. If anybody was entitled for a bail out were Bernie’s victims. Why? Because the government failed to enforce it’s own laws.

    So now what? New laws that will screw us… Of course. What has come to this country that I have to look for refuge in some third world shit hole?

    Am I living a nightmare? I hope so.

  23. Jack Maverick on

    “What has come to this country that I have to look for refuge in some third world shit hole?”

    Really, I never imagined that things would get so bad that I’d be seriously considering leaving the U.S. permanently. Ah, the “fundamental transformation of America”…Jeez, I just wish he’d told us that what he meant by that was reducing it to ashes.

  24. Sick and Tired One on

    ” I just wish he’d told us that what he meant by that was reducing it to ashes.”

    His whole life story screamed that.

    Like somebody said it somewhere, I’m not afraid we’ll survive his presidency, but I am not sure how this country is going to survive the electorate that put him there.

  25. While it’s all well and good to change and regulate, once again, we segregate at the same time. The application of reduced leverage on a selective basis represents discrimination and forcing the use of individuals that get a “vig or juice” just like the local loan shark, promotes a monopoly. The banking and financial institution monopoly. Sad commentary on a group of individuals responsible for nothing more than trying to get to a better financial place because the American dream of retirement with dignity is truly a dream, one I will fondly remember. For every smarter mousetrap, there are smarter mice. So what DO we DO?

  26. Pingback: CFTC Babysitting Traders | Forex Crunch

  27. Sick and Tired One on

    “And now let’s get more serious.I believe that the 50:1 leverage that was finally ruled is a plausible compromise from the original 10:1 limit that would have created serious damage to the US forex industry. The industry is growing up.”

    Really? What if they came with a 1:1 and then settle to 1:10? I bet you would have bee as happy then.

    Whatever…. I can’t believe what an idiot you are.

  28. Jack Maverick on

    My question to author remains: Explain to me how this rule in any way benefits the small, independent forex trader? I maintain there is NO benefit to it; it only further restricts our freedom.

  29. I’m guessing that it will take novice traders LONGER to lose their stash. And that’s all. It is meant to protect the banks and brokers from losing out. The BIG get BIGGER again.

  30. Joan Moreau on

    To the writer of the article:
    I agree with few post here: please do not get drunk before writing.

    * Limiting the leverage has NOTHING to do with “saving people from themsleves”
    * However, it has everything to do with “let’s make our club of already rich people more protected”

    Most people will use a foreign broker, other will abandon, what is the benefit here for the US citizens ?

    If someone would explain…

  31. foreign broker doesn’t work. Foreign BANK gives u another 360 days. Monopolies are great when you are inof one and suck when you are bucking the system.

  32. Before Oct 18th USD/JPY needed $1,000 for leverage..If a margin call came and went unnoticed..oops you lost a grand..After Oct 18th USD/JPY will nbeed $2,000 for leverage..here comes that margin call, while you were sleeping..oops you lost 2 grand..Yeah that sure is a better deal…NOT

  33. >Overseas brokers who are not registered with the CFTC will not be able to accept U.S. residents.<

    Nonsense. Any number of foreign brokers without a U.S. presence gladly accept US clients. The CFTC can declare this illegal til they're blue in the face. They have absolutely no enforcement capability against such a broker, or against the customer.

  34. Lowering the leverage, while the market is the same market makes it more attractive by not being the “wild west”? Since when is forex manipulated like a penny stock? attractive for whom?

  35. After 2 years of dummy trading, my dad and I were about a week away from going live. We had been practicing with $1000 accounts, but with this new 50:1 leverage rule our profits are cut by 80%. Basically putting us out of business before we even begin. I can’t believe this.