The European Securities Market has certainly made its mark on the world in terms of the Foreign Exchange and this is all because they have imposed some new rules when it comes to Forex trading. These new rules include a ban on the binary options and it also includes a strong demand for transparency as well. They have also stated that negative balance projections need to be stated and that there are going to be leverage limits as well. This is a huge problem for traders. The following is going to come into place:
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30:1 for Majors
This is the most common currency pair and it will offer the lowest spread. That being said, you will still enjoy quite a high level of leverage. Of course, this isn’t what it used to be at all but it is still considered to be a very considerable level compared.
20:1 for Non-Majors
Major stock indices and even gold are included in this sector. When you look at stock indices you will soon find that they are way more popular when you look at broader markets but they are going to be far less so for those who trade in Forex. Minor pairs offer a huge range of spreads and gold has even more volatility on the market. For this reason, the leverage limit being even lower does make some degree of sense.
10:1 for Non-Gold and Gas
This also includes silver and other commodities as well. They tend to move at a much faster clip when compared to the assets before and for this reason they do tend to suffer from a lot less volatility when compared.
5:1 for Stocks
Trading stock with someone who is a forex broker isn’t common practice at all, but if you are a currency trader who wants to venture into single stocks then you’ll soon see that the leverage is way tighter and this really does go hand in hand when you look at the much higher volatility it has.
2:1 for Cryptocurrency
It really isn’t a secret at all that there is a lot of volatility in cryptocurrency and that ESMA has imposed the highest possible restriction when it comes to digital coins. A lot of traders will be using cryptocurrency wallets but if you were to use a forex broker then you may find that this is a great way for you to dive in.
When you look at the country of Japan- you’ll see that they actually imposed a max limit of 25:1 some time ago. The traders and brokers in that country are still doing well and it really is just another part of the well-known Forex structure. The lower limit has not stopped Japanese brokers at all, in fact, it may have even encouraged them.
The current regulations really are temporary and they need to be reviewed and renewed every couple of months. At the moment however it does seem very likely that ESMA will review them but nothing is certain at this point. On top of this, it’s important to know that the new rules are really only about limiting leverage. You should note that forex brokers are also required to go ahead and publish the percentage of traders who are actually profitable. The new transparency regulation helps those to make sure that brokers are being chosen properly. If you have a broker who has a very high percentage loss when compared then something must be going wrong here. When you are able to see this and then move to another broker, you’ll soon see that this is a huge advantage to the person who is trading.
Of course, ESMA also requires a projection on negative balances. When you look at the events of the SNBomb you will find that this isn’t going to happen again. The Swiss National Bank actually removed its peg and this also left brokers having to pay their negative balance while also losing a lot of their deposit. This is the past and now cases like this are not happening at all. That being said, that doesn’t mean that they can’t go on to return.
If you want to get higher leverage then traders who are outside the EU do not actually need to comply with these new regulations. This may be forbidden by the rules of the country that you are staying in at the moment. On top of that, if you trade through an external broker then this means that you have no protection in case that trader has some issues regarding withdrawing or even anything else that may come up. The regulation comes with its fair share of advantages and they are not to be overlooked at all.
If you are in the UK then you may be wondering if these rules still apply. As the UK is leaving the European Union on the 29th of March next year, there is going to be a transitional period that runs all the way through December 2020. During this time, every single one of the ESMA regulations are going to apply to Britain. The FCA has actually welcomed this new guidance as well. Now you may be thinking what happens after 2021. The government is trying to leave the EU and if this comes to fruition then the FCA will have to set their own rules. Note that these are far from being finalised.
The founder and current president of FXStreet has stated that this regulation may actually be a step forward when it comes to making forex an asset. It may also help people to distinguish between three different types of brokers and give those who are trading a very clever choice. Sure, the industry may have to go through an adjustment period but there is going to be some positive development from this and that is the main thing that you should be focusing on.