What is the new forex leverage after the ESMA regulation? Read this article to discover how traders outside Europe can continue trading with a leverage of 1:400.
Leverage is basically a loan given to traders by their broker to enable them to hold more positions in the markets and increase profits. Lots of people new to trading get confused by this concept in Forex, especially the way it’s calculated and how it should be used.
For example, in order for a trader to have in their trading account a $100,000, the broker they are using sets aside $1,000 in the live trading account. This would make the leverage ratio set at 1:100. The trader is now controlling $100,000 with $1,000.
In Forex, leverage trading is an important necessity as it can help traders in the Forex market to greatly magnify their gains by enabling them to control larger positions in the market.
A standard trading account with a regular broker will usually deal in lots of $100,000. To make a single trade with an account, a trader will need $100,000 to place on it. This figure is beyond the reach of most people so this is why brokers offer a leverage.
In order to allow people to trade these large lot sizes, brokers will effectively loan traders money to place the trade. This is normally only provided with the assumption that traders will give the broker part of the trade as a security against it. If the trade falls by more than what was initially put up as collateral, the broker will close the trade and that money will be lost, but if the trade moves in trader’s set direction then the trader stands to make a good profit.
It is very important to point out that leverage works both ways. Whilst a person can earn a lot of money very quickly by making winning trades, they can also lose money very quickly by using leverage, hence making leverage trading in Forex a double-edged sword. This is not uncommon either. There are lots of Forex traders who have blown their account completely just through one single losing position and all because they over-leveraged themselves.
It is always advisable to understand all the risks involved when trading leveraged products such as Forex and metals. It is also vital that a trader remembers not to trade on what they cannot afford to lose.
New Forex Leverage – ESMA Regulation
In order to protect traders against high leverages, the ESMA decided to reduce the new forex leverage to 1:30 for European clients.
ESMA stands for the European Securities Market Authority, and they regulate the trading policies for the whole of the European Union. As well as the leverage change, the 2018 ESMA ruling affected many other market policies such as completely banning binary options trading and regulating trader bonuses.
The main reason for ESMA setting the leverage regulation cap to 30:1 was to provide traders with further negative balance protection measures and to stop brokers from aggressively marketing high leverages to traders.
2019 ESMA Update
The ESMA regulations are still in place and have been upheld by the authority for use in 2019. However, it appears that the Forex industry has adapted quite well to the changes and brokers have adjusted to the leverage change. The increase in transparency about any potential losses has also helped traders to protect themselves further and feel more confident about leverage trading.
To conclude as leverage comes with greater risk, a trader must be responsible and mature when making use of it. It’s also important to mention that leverage is not a necessity in Forex trading, so there is no pressure for traders to make use of it if there is no wish to do so.
All traders aim to make money, so to do this they should use strict money management rules. This means employing a tight stop loss and only risking a very small percentage, such 2% or 3%, of their trading capital on any one trade. This will mean that any losses incurred are kept small in relation to the total bankroll.
The main thing to remember is that traders will make substantial profits from Forex trading when they use a good leverage. With the new forex leverage some positions should be reserved solely for traders who want to change their lives with large profits. Yet in the end, leverage aside, it is important that all traders are willing to trade responsibly and must follow their trading rules, strategy and proper risk management.
Leverage plays a major role in the journey of a successful trader, making it a vital part of Forex trading.
Read here where you can keep trading with the new forex leverage 1:400. (Only for non-European traders.)