Proposed CFTC Leverage Change to 10-1 for all US Brokers

Beginner Questions
62

Hi, Pipperazzi

You determine for yourself how much leverage to use (up to the limit allowed by your broker) each time you open a trade.

If you have a $1,000 account balance, and you open a $10,000 position, you are using 10:1 leverage.

An example of such a position would be: 1 mini-lot of USD/CHF.

If you open a $20,000 position (2 mini-lots of USD/CHF, for example) in your $1,000 account, you are using 20:1 leverage.

Your broker might be offering you maximum leverage of 100:1.

But, that doesn’t mean anything, as long as the actual leverage you use is below the broker’s maximum.

63

Depends on your broker. Some brokers will allow you to change the leverage on your account. I do not know of any legitimate brokers that allow you to select the leverage during order entry. Not to say they don’t exist–just I haven’t seen any.

I’m curious to hear why you might need that option in a broker?

64

Apparently there are 2 kinds of leverage…one has to do with margin requirements, and the other with position sizing in relation to your account balance…one you set with your account, the other you set per trade.

:slight_smile:

65

Yes, but if the CFTC gets their way and I had a $1,000 with 10:1 leverage, I would/might only be able to open 1 mini ($10K) lot max…definately wouldn’t be able to open 2 mini ($20K) lots, but I could with 100:1 leverage…:smiley:

However, if I open a 0.1 mini lot position with 10:1, then I’d be ok cause it would be like 100:1, only I’d be making, what… 10 cents a pip…lol

66

Correct. The 2 kinds of leverage are:

B[/B] the maximum leverage allowed by your broker, say 100:1, which determines the margin your broker levies on your position.

[B]margin = 1 / maximum allowable leverage[/B]

example: leverage = 100:1; therefore margin = 1 / 100 = 0.01 = 1% of position size

B[/B] the leverage you actually use when you open a position; in other words, what portion of that maximum 100:1 you use.

[B]actual leverage used = position size / account size[/B]

example: position size $10,000; account size $1,000; actual leverage used = 10:1

Correct (if you ignore the spread).

Actually, you would not be able to open a $10,000 position with a $1,000 account, because of the spread cost.

Under the proposed 10:1 maximum leverage scenario, if you had exactly $1,000 in your account, and you attempted to open a $10,000 position, your broker would designate $1,000 of your account (in other words, your entire account) as margin, making that sum unavailable to cover the spread or any loss you might take.

Then, simultaneously, the platform would automatically charge your account the spread, making your account balance negative, and resulting in an instant margin call.

67

Hello all, i have some gray areas about leverage and would like to have some clarification. I’ve numbered them- please, i’d appreciate responses in this form:

  1. T
  2. T
  3. F
  4. T et.c
    where T means true and F means false.
    Let’s go…
    Suppose I opened a MICRO account (1 lot = 1000 units) with a forex broker and funded it with $100 and accepted to use leverage of 100:1,
  5. If I open a trade of 1 lot, only $10 from my account would be used by the broker to enter the trade, leaving $90.
  6. 1 pip movement in my favour earns me $0.10 and I lose same if the movement is against my position.
  7. The market would have to move 100pips against my position to make me lose the $10 put into the trade (assuming no stop loss is set).
  8. From the scenario in question 3. (above), I can only lose $10 because the broker closes the trade (to my loss) when the invested $10 is lost; my $90 left is untouchable.
  9. If I buy 2 lots, $20 is used from my account to enter the trade and the market will have to move 200pips against me to make me lose the $20 (assuming no stop loss is set).
  10. With my available leverage, I can make a (maximum) trade of 10 lots.

THANK YOU.

70

1 and 2 are TRUE.

3, 4, 5, and 6 are FALSE, or partly FALSE.

Here are the details:

B[/B] You cannot lose the $10 margin charged by your broker. You can lose the $90 which is not margin.

Let’s go through this, step by step.

You enter a 1-micro-lot trade (1,000 units). Your broker earmarks $10 of your account for margin. Think of this as putting $10 of your money in an escrow account. It’s still your money, but you can’t use it to cover losses. You will get it back, when you close your position. The purpose of this margin amount is to protect the broker (not to protect you).

B[/B] As stated above, you can lose all of your account except the $10 margin amount, if you let a losing position run against you, without a stop-loss.

B[/B] This question implies that you can lose the $20 margin amount, and only the $20 margin amount. Again, you cannot lose the amount set aside as margin — but, you can lose all the rest of your account.

B[/B] No.

If you attempt to open a 10-micro-lot position with a $100 account, your broker will set aside $100 (in other words, your ENTIRE account balance) as margin.

Then, he will charge your account a spread, making your account balance negative.

Then, he will immediately close your position, and issue you a margin call.

Then, he will return your $100 margin to your account.

At this point, your account balance will be $100 MINUS the spread cost MINUS any loss which may have occurred in the 1-2 seconds that it took for all of the above to happen.

71

Here’s an Editorial by Ginger Szala in the March issue of [I][B]Futures Magazine[/B][/I]. The subject is the response that the CFTC is getting from brokers and traders to the 10:1 leverage proposal. Forex: Leveraging free speech - Forex - Futures Magazine

If you haven’t made your views known to the CFTC on this issue, don’t delay any longer. Time is running out.

The “comment period” will end on March 22.

Send your comments directly to the CFTC at: <[email protected]>.

Include ‘[B]Regulation of Retail Forex[/B]’ in the subject line of your message and the identification number [B]RIN 3038-AC61[/B] in the body of the message.

You can also submit your comments by either of the following methods (include above ID number):

Fax:

(202) 418-5521

Mail:

Mr. David Stawick, Secretary
Commodity Futures Trading Commission
1155 21st Street, N.W.,
Washington, DC 20581

72

Clint,
Thanks for your response. It has cleared some gray areas. Please, permit me to modify #6 based on what you wrote, and also ask more:

"If you attempt to open a 10-micro-lot position with a $100 account, your broker will set aside $100 (in other words, your ENTIRE account balance) as margin.

Then, he will charge your account a spread, making your account balance negative."

  1. Leverage only permits you to buy more lots than you would have been able to. This means with $100 in my MICRO account, I can buy up to 4 lots (requiring a total of $40- with the other $60 going for spread and being risked in the trades).

  2. Without leverage ( i.e., trading with 1:1), $1000 in my MICRO account cannot be used to trade 1 lot (1 lot equals 1000 units) since they’d have to hold the $1000 and there’ll be nothing left to trade with.

  3. From the previous scenario of the $100 account, as you say, that my $90 can be gulped without a stop loss, with the $10 being preserved- the market has to move 900pips against my position for me to lose the $90.

Thank you.

73

You got it. Congratulations.

It sounds like you have mastered the twin topics of:

[ul]
[li][B]maximum allowable leverage[/B] (which is set by your broker) — and its inverse, [B]margin[/B], and
[/li]
[li][B]actual leverage used[/B] (which is chosen by you, when you plan your trade)
[/li][/ul]
One other comment:

In your point #6, you mention trading 4 micro-lots in a $100 micro account. Your math is correct. But, I hope you would not actually place such a trade. The actual leverage used in that trade (40:1) is way out of line with prudent money management.
If you calculate risk as a percentage of account balance, you will see why a 4-micro-lot trade is way too big for a $100 account.

But, I suspect that you already know that.

Clint

74

Hi Clint,
I can’t thank you enough for the clarification.

PS About the 40:1 trade, it was only for the math and to ensure understanding. That’s really poor money management!

75

Hello all,
I’ve got another gray area:

In a bid to sensitize people on the dangers inherent in high leverage, I’ve often heard people say stuff like, “your trader may offer you leverage of 400:1, that doesn’t mean you should USE IT, the choice is up to you…”. Do they not mean to say, “…that doesn’t mean you should CAPITALISE ON IT…”?

I’m asking this because from my understanding, on opening (most) forex accounts, you inform your broker the leverage you would like to use from those he makes available, (say, you choose 100:1, for example)- and this leverage is what every trade of yours will be based on.

76

Wow, what a great quote!

77

The comment deadline is almost over. Email <[email protected]> or watch them swallow retail forex up for good!

78

That is just one of many illuminating quotes from Rob Booker, who just did a fantastic webinar on the CFTC’s leverage proposal. For those of you who don’t know Rob he is a regular speaker at the forex trade shows and knows this industry inside and out. Great info, have a look:

CFTC_Webinar

79

There are 3 business days left until the CFTC closes the PUBLIC COMMENT period on their proposed new forex restrictions.

[B]If you have not yet submitted your comments to the CFTC, do it today. — Monday, March 22, is the deadline.[/B]

I interrupted my trading tonight to watch the WEBINAR which [B]stevoforex[/B] linked to. This webinar is a presentation by
Rob Booker on the full scope of the CFTC’s proposals, and what we should do in response to them.

I thought I knew everything I need to know about this issue. Then I watched the webinar and learned a ton of new information.
I want to encourage everyone who is serious about trading forex, now and in the future, to watch this presentation.
It’s an hour and 20 minutes in length, so set aside some time. This webinar is well worth your time.

Scroll back to post #75, or click this link 301 Moved Permanently — and then click on the [B]CFTC Webina[/B]r link in stevoforex’s post.

Rob Booker is especially qualified to speak on this topic. He is a TRADER, he is an IB for a major U.S. forex broker, and he is an ATTORNEY. He has studied the entire CFTC proposal, interviewed regulators at the CFTC and the NFA, and uncovered the answers to most of the questions you might have about this proposal and its implications for your trading.

[B]This webinar addresses, among other things, these questions:[/B]

[ul]
[li]aside from the 10:1 proposed leverage restriction, what else is the CFTC proposing to do to the retail forex industry?
[/li]

[li]what is the relationship between the CFTC and the NFA?
[/li]

[li]what are the CFTC’s motivations in proposing these forex restrictions?
[/li]

[li]are big banks, hedge funds, or institutional forex brokers behind the push to reduce forex leverage?
[/li]

[li]what are the odds that this 10:1 leverage rule will be implemented?
[/li]

[li]if this rule goes into effect, when will changes occur in U.S. trading accounts?
[/li]

[li]what other leverage limits, besides 10:1, is the CFTC considering?
[/li]

[li]what should we urge the CFTC to do, in our comments to them?
[/li]

[li]what should you do immediately about your live trading account?
[/li]

[li]can you move your existing account off-shore?
[/li]

[li]can you open a new off-shore account?
[/li]

[li]will the CFTC be able to interfere with your off-shore account?
[/li]

[li]will other countries be pressured to restrict forex leverage?
[/li]

[li]what about taxes on an off-shore account?
[/li][/ul]

One last appeal to get your comments in, before the deadline:

Send your comments to the CFTC via email or fax. It probably is too late to use ordinary mail. Go to this post for the email address, and the fax number — 301 Moved Permanently

When you communicate with the CFTC, be polite and professional. This is not the place for rants against "the nanny state"
or government intrusion into our lives.

You are communicating with [B]regulators[/B] who are [B]career bureaucrats[/B]; they view their activities as a vital public service.
Don’t belittle them. If you come across sounding like a troll, everything you say will likely be disregarded.

The deadline is Monday. Please don’t delay.

82

We have some allies in the U.S. Senate.

Here is a letter from one of them — Senator Orrin Hatch — to the CFTC, urging no new forex leverage restrictions:

http://cftc.gov/ucm/groups/public/@lrfederalregister/documents/frcomment/10-001c172.pdf

This is absolutely your last chance to tell the CFTC what you think about this issue.

[B]The PUBLIC COMMENT PERIOD closes today[/B], presumably at 4:30pm EDT.

If there’s anything else you want to say to the CFTC regarding their proposed new regulation of retail forex, do it this morning. Email or fax only. See the previous posts on this thread for instructions.

83

Today is the comment deadline! Email <[email protected]> today and tell these bureaucrats hands off our leverage!!!

84

85

Hmmm…I think a pip count is in need of clarification.

If you had 1 open contract , on a 100$ account, that was at a cost of 10$
And each pip was 10 cents… (this is an example only please). 90$ left in the
Account times 10 would be 900 pips to zero…excluding any commission.

It said above if you open multiple contracts it is still 900 pips to zero.

I think there was a mistake/misunderstanding there…?

Example begins:

1000$ account. 1 contract = 1$ pip movement
900 pips to zero

4 contracts =4$ per pip movement or approx 4 times faster to zero.

Either I misread the explanation or it was glossed over…but more contracts (ignoring
For the moment reduction in purchase loss of margin) reduces the remaining balance
In the account that much faster.

Redhunter

Ps:I’m typing this on my mobile phone, so forgive the weird capilizations and
Poor grammar as these keys be small.