What is the new forex leverage after the ESMA regulation?
Read this article to discover how traders outside of Europe can continue trading with a leverage of 1:400.
What is Leverage?
Leverage is simply a form of loan given to traders by their broker. This lets them 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 $100,000, the broker they are using sets aside $1,000 in the live trading account. This would make the ratio set at 1:100.
The trader is now controlling $100,000 with $1,000.
In Forex, leverage trading is an important step as it can help traders in the Forex market to increase their profits 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.
To let people trade these large lot sizes, brokers will effectively loan traders money to place the trade.
Leverage & loaning terms
A loan is normally only provided with the assumption that traders will give the broker part of the trade as a security against the loan.
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.
However, if the trade moves in the trader’s selected direction, then the trader stands to make a good profit.
It’s very important to point out that leverage works both ways. Whilst you can earn a lot of money very quickly by making winning trades, you can also lose money very quickly by using leverage.
This is what makes it trading in Forex a double-edged sword, you must consider using it carefully.
There have been cases of Forex traders who have blown their account completely just through one single losing position. All because they over-leveraged themselves and went out of their depth.
It’s always worth understanding all the risks involved when trading products such as Forex. It’s 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 this change, the 2018 ESMA ruling affected many other market policies. This included completely banning the trading of Binary Options.
They also stopped European online brokers from using promotions and bonuses to attract and keep clients.
The main reason for ESMA setting the leverage regulation cap to 1:30 was to provide traders with further negative balance protection measures. This would stop brokers from aggressively marketing high leverages to traders.
2019 ESMA Leverage Regulation Update
The ESMA regulations are still in place and have been upheld by the authority for use in 2019 and 2020.
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 trading.
Currently the regulations are reviewed every 3 months but so far nothing has changed. We don’t really expect it change either. However, if there should be any new announcements for 2020 we will keep you posted!
Because leverage comes with greater risk, a trader must be responsible and mature when making use of it. If you decide that you want to use leverage as part of your trades, then plan it well and don’t go beyond your trading budget.
It’s also important to mention that leverage is not a necessity in Forex trading. So there’s no pressure for you to use it if you don’t wish to.
All traders aim to make money, so to do this they should follow strict money management rules. This means employing a tight stop loss and only risking a very small percentage. For example just 2% or 3% of their trading capital on any one trade.
This will mean that any losses made 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 only 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 and strategies.
This includes as well following a proper risk management plan.
Leverage plays a major role in the journey of a successful trader, making it a vital part of Forex trading.
Read our BDSwiss review where you can keep trading with the new forex leverage 1:400. (Only for non-European traders.): https://tradingonlineguide.com/bdswiss-review/