Let’s Talk Leverage!

Today (27th March 2018) the pan-European financial regulator ESMA released its final proposals to govern leveraged trading, which remain unchanged from its original proposals.

Apart from banning Binary Options, essentially it boils down to the following Leverage limits which the FCA is expected to follow in due course:

1.    Leverage limits on the opening of a position by a retail client from 30:1 to 2:1, which vary according to the volatility of the underlying:

·         30:1 for major currency pairs;

·         20:1 for non-major currency pairs, gold and major indices;

·         10:1 for commodities other than gold and non-major equity indices;

·         5:1 for individual equities and other reference values;

·         2:1 for cryptocurrencies;

2.    A margin close out rule on a per account basis. This will standardise the percentage of margin (at 50% of minimum required margin) at which providers are required to close out one or more retail client’s open CFDs;

3.    Negative balance protection on a per account basis. This will provide an overall guaranteed limit on retail client losses;

4.    A restriction on the incentives offered to trade CFDs; and

5.    A standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.

So what impact will this have on retail traders?  Well you will need sufficient trading capital, but more importantly if you employ robust Risk and Money Management in your trading then these new Leverage limits should not impact your trading of Major and Minor Currencies, Major Indices and Gold.  Only those foolish enough to trade without using strict Risk and Money Management rules will be significantly affected.  If you trade Individual Equities and Crypto CFDs then there may be an impact.

Using lower Leverage has always been a great way of stopping oneself from ‘Over Trading’, because your trading platform will alert you to the fact you have insufficient funds to open any further trades.  So this fact makes a trader be selective about which trades they take and to manage their position size(s) commensurate with their amount of trading capital and the size of their stop loss.

Lastly,  if you don’t understand the terms Leverage and Margin then check them out before you take another Live trade.

Top Trading Tip:  Always use Robust Risk and Money Management when trading and employ lower leverage to prevent ‘Over Trading’ and exposing oneself to too much Risk.