“leverage in retail forex customer accounts would be subject to a 10-to-1 limitation,”

It seems they are proposing a 10 to 1 maximum leverage for retail traders.

Most retail traders are small account traders compared to institutions.

It may seem that the CFTC is trying to “safeguard” the trading public and marketplace with these new proposed changes. However the reality is that most financial disasters that occur because of over leveraged trading are because of a rogue trader at an institutional trading desk who is trading unchecked and without restraint.

Most retail traders currently trade at upwards of 100 to 1 or even 200 to 1 leverage. Most retail traders also trade less than 10 standard size lots which is less than 1 million dollars worth of currency. The current standard leverage amounts allow traders to control $100,000 worth of currency for a $500 or $1000 margin.

If the new rules are enacted  it will mean traders will have to put up $10k to trade a standard size lot of foreign currency, instead of $500 or $1000.

This will put most retail traders out of business and many retail forex brokers will go with them by the wayside. Instead institutional FX trading desks will continue to thrive and trade higher leveraged amounts.

Instead of safeguarding the industry the new rules will put a damper on the industry in general yet still allow institutional traders to continue to trade with the higher unchecked leverage amounts.

In other words the new rules will do nothing but curb the growth of one of the fastest growing sectors in the financial services and markets.

Since forex dealing desks and retail brokers are highly computerized and mark to market on a tick by tick basis, there is virtually almost zero chance that a retail trader would go into the red on a bad trade. His position would be liquidated well before the balance on his account went into negative territory.

On the other hand, many institutional transactions are done with a phone call and a promise and not marked to market tick by tick, but by daily accounting, the promise to deliver funds on a trade are as good or as big as the institution behind the trade. Because of this, we unfortunately hear of over leveraged trading desks at times almost bankrupting a bank or trading firm because of a rogue trader.

We think the new 10 to 1 rule will cause retail traders to open accounts outside the USA and existing brokers will just funnel their retail USA business to a foreign trading desk.

The FX market is the larget market in the world.

Although the CFTC may appear to be doing something good for the industry, the bottom line is that it will ultimately end up not making much impact and become difficult to implement effectively.

With offices on Wall Street, in the U.K. and Russia they are one of the growing firms in the global forex brokerage arena.

A distinguishing feature of Alapari U.S. is that they are a registered member of the CFTC and the NFA. Which basically means that they have stricter accountablitily in terms of compliance. One such example of this is their maximum leverage ratio of 100:1 for trading.

On a recent phone call with Alpari it was noted that as of November 2009 all U.S. brokers will have to comply with new rules that limit maximum leverage on forex contracts to 100:1 and that firms that offer more such as 200:1 or 500:1 (at least in the U.S.) will be out of compliance and breaking the laws regarding new NFA rules.

Many smaller lot traders prefer trading 200:1 or even 500:1 so these new rules may affect trading strategies.

Alpari offers a micro account which is similar to other micro accounts which are sized at .01 in addition the offer a retail account which is sized at 0.1 which is the usual size for mini accounts at other firms.

Another interesting factor is that the size limits on a  position with their micro account is $100k or one standard lot, and their position limits on their retail accounts have no limits.

Many over the counter forex brokers have a stated 50 lot or 100 lot limit on their positions, but Alpari is one of the few retail FX brokers that have no size limits on their standard accounts.

One thing to note is that Alpari does not guarantee “no negative balances”. Most firms in the retail FX arena do have a “no negative balance” policy, however Alpari does not. So in the very worst case scenario, you could be on the line legally for more than your risk capital. In this day of totally automated and hedged contracts on the broker side, positions usually get closed well before margins are wiped out, however Alpari does leave themselves a legal loophole to their own advantage. This is probably why they can offer no position size limits because they ultimately transfer all risk to the trader. This policy and procedure is pretty standard operating procedure in the futures and commodities markets with futures brokers, but recently in the retail forex arena many brokers offer a “no negative balance” guarantee.

Lastly setting up an account with Alpari is easy and straightfoward. They accept Credit Cards, PayPal, and bank transfers. Withdrawls are by check or wire transfer direct to your account.

For their retail account there is a $1000 minimum.

For their micro account there is NO minimum, so they become a good choice for testing new EAs in a live environment.

What we are going to discuss applies purely to speculative trading. If you are hedging a stock position or commodity contract with an underlying option contract, you will have few alternatives other than the option to hedge.

However, if you are considering options trading from purely a speculative trading aspect, then the Forex markets may help you reach your speculative goals more efficiently and effectively.

Here are several key factors and reasons why Forex trading is the largest sector of financial trading in the world.

1. Forex is a true 24/5 market. From the Asian open to the European close all the way to the USA open and close, forex trades virtually 24 hours a day 5 days a week. Compare this to the stock and futures markets which do have global counterparts, however, most of the action is limited to each countries and each markets trading hours. With is this global liquidity you can pretty much initiate and close trades effectively almost at any time around the clock.

2. Massive Liquidity. There are only a handful of currency pairs that offer huge liquidity, such as the EUR/US and US/JPY and other major currency pairs. Of these currency pairs, they are traded around the world by trading firms, banks, corporations, hedgers and speculators.

3. Huge Leverage. Most retail forex brokers offer 100:1 to 200:1 leverage. Some offer even more. What this means is that you can control a $100,000 currency contract for as little as $1000 or even $500. What this means is that if you trade just 10 standard size currency lots, you can usually control a million dollars worth of currency for about ten thousand dollars. What does this equate to in dollars trading? If you traded 10 standard lots of EUR/USD a one pip move is worth $100 up or down to you. The EUR/USD occasionally has moves of over 200 pips and more in a day which means $20,000 of opportunity for $10,000.  This explains why more fortunes are accumulated (and also lost) in the Forex markets, much more so than the stock options or commodity options markets.

4. Automated Trading. Forex trading offers a slew of automated trading options and 99% of the trading and analysis software available are offered completely free by most of the forex brokers. For example a popular charting and trading software being used by many retail forex traders is Metatrader. Metatrader not only has a plethora of charting and technical analysis tools, it also allows you the ability to create what are called “expert advisors” or EAs which are simply automated custom programmed indicators, charting tools and automated trading routines which can enter and close trades and manage position sizes automatically based on any parameters you program. Metatrader can also run pre packaged off the shelf EAs that are sold by others.

5. The Forex market is hardly affected by weather or corporate management or misconduct or earnings reports, but is moved by geo political factors and economic reports of governments. Many of these reports are regular monthly and quarterly reports released at the same scheduled time by government entities.

6. The Forex market continues to get bigger every year. In time, because of the nature of accessible information online, forex trading will become as ubiquitous as stock trading.

7. The ability to start small. Many forex brokers offer mini accounts. Some offer micro accounts with smaller contract sizes that allow new traders and smaller traders to participate with less overall finacial risk.

8. The ability to trade leveraged positions, just like the futures markets and stock trading on margin.

9. The ability to trade via automated signals automatically without lifting a key on the computer or without touching the phone. Similar to a managed forex account but without the commitment or management fees… A new trend in forex trading is “automated forex trading”. You can do it yourself if you have a system and programming knowledge or if you buy a program and do it all through Metatrader. Or you can subscribe to a free service such as ZuluTrade and pick your own forex signal providers and have all of their trades routed to your account. With Zulu Trade you and choose who to trade through at anytime. You have complete control of your account and simply choose the best performing traders and allow ZuluTrade to route thier trades to your account. You pay no extra fees for this. Zulu makes money from a spread rebate though the broker you select, and you make money when your chosen provider successfully trades. The nice thing about ZuluTrade is that you can see and analyze each signal providers past performance before you choose to autotrade with them.

10. A universe of trading information. The world of forex trading has a virtually unlimited amount of information and resources, most of it is free and since the trading community is global you can access information from people all over the world who are trading the same currencies as you are. Once such community is at ForexFactory.

Registration is free and posting is easy. Usually within an hour or two of posting there is another community member replying or helping to answer your questions about forex trading.

We recommend Forex Factory highly. Whether you are new or experienced forex trader, you will find something of benefit there.

Last updated: March 29, 2010

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