The new CFTC rules regarding forex imposed leverage limits that angered many traders. Nobody likes to be held back. But after 6 months, there’s evidence that these limits might actually be helping traders make more money.
On October 18th, the new leverage limits came into effect: 50:1 on major pairs and 20:1 on others. This was worse than the initial proposal of 10:1, but it still caused fury and thoughts that traders would move their accounts to foreign brokers.
Another rule made by the CFTC allows us to see the number of traders in each account, and the profitability rate. You can see a nice summary of the data for Q1 2011 here.
First of all, we see that the number of accounts in the US hasn’t fallen. Not yet. It even grew. Of course, it’s arguable that the number could have risen if no limitations were imposed.
But let’s look at the profitability rate. This has actually experienced a rise. The percentage of US traders that profit on forex is on the rise.
It’s also important to note that this rise comes on top of stricter rules regarding the definition of “profitable accounts” – the new limits exclude accounts that weren’t active, but enjoyed “profits” due to interest paid. See who the leading brokers are in this field.
How can this be explained?
The No. 1 reason that new traders burn their forex account is due to bad money management. They risk a large part of their account in every trade. Since they are inexperienced, they lose money quickly and don’t have a chance to learn, as their account is gone before they understand what they’re doing.
With new leverage limits, they are forced to risk less, meaning they can afford more reasonable stops and can afford a few losing trades until they pick up the game.
It will be interesting to see if this is a trend of improvement in profitability or just a coincidence, as many factors impact profitability. I believe that this trend will continue, given that money management is improving, whether you want it or not.