Comment Text:
i0-001
COMMENT
CL-01156
From:
Sent:
To:
Subject:
Khurrum Mahmood
Wednesday, January 20, 2010 9:19 PM
secretary
Regulation of Retail Forex - Account Leverage, Risk, Timeframes, and Trading
styles
Hi
My first point would be that limiting leverage is more an enforced protection against stupidity and
ignorance. Rather like stopping everyone from being able to drink because some people can't handle it.
Although experienced traders will only rarely use 100:1 (or higher in some cases) leverage, there are
times when it is useful. Ultimately, its a matter of how much money you're risking and how much you
hope to gain. If you're looking for a few pips over a short timeframe, a 100:1 leverage is no real threat at
all. Reducing available leverage would really just remove some traders' ability to trade in the style they
know to trade with. Rather like the ban on hedging - some people just can't trade effectively without
hedging (as a psychological issue) - some people use it to make much greater profits.
Besides, limiting US brokers only forces traders to look outside the US for brokers. Personally, both of
my trading accounts are outside the US - even though I personally don't use hedging in my trading style
or use 100:1 leverage. I was just learning about Forex when the NFA rules against hedging came out,
and I didn't want to be limited if it turned out I needed to use it to make money. Seriously, its better that
US brokers make money from US customers, than that brokers abroad make money from US customers
unnecessarily.
One suggestion I do have for a regulation..,
trading the larger timeframes is easier even if money is
made slower. The minimum lot size, at various brokers can limit the ability of novice traders and people
with small capital from trading those timeframes. It might be better for a lot of investors, if the option to
use even smaller lot sizes was possible, so that that avenue would be open to them.
Pass regulation to make all Forex brokers support the use of 0.0001 standard lots. That way people who
are learning, or people who have little money but want to trade the daily and weekly charts, have a
chance to make money without taking high risks.
Important Point:
You see it really doesn't matter how much leverage is available, what matters, is how much of someone's
account they can risk losing on a single trade. Lets assume 1:10, and you buy 1 standard lot with a $10K
account, on the GBPJPY, and it goes against you by 300 pips in one day (which happens from time to
time). You lost $3000+ - 30% of your account. If that happens, what it really means is that you were
severely over-leveraged on that trade, despite the fact that you only used your max 1:10 leverage.
Someone who acts stupidly like this, could burn through their account quite fast.
In theory,
you could
force the use of a maximum stop loss, compare that to the position size and enforce
rules that say that a trade is invalid if it risks more than a
maximum
of 5% of a trader's account on a
single trade - and that's good trading practice, generally you should risk less than that. But anyway, that
way someone can use 200:1 or 400:1 leverage, and not be able to enter trades that will lose them a lot of
money.
If such a rule existed, I can't say I'd find a good objection to it... apart from the fact that forcingi0-001
COMMENT
CL-01156
customers away from US brokers to brokers overseas, doesn't really help us. Ultimately people must
have a right to buy the services they want to buy - the only important thing is that they be educated.
Improve the warning that people are given when they enter forex trading, on what they are really
risking, if they are careless. Have variations of it tested to see what expression and wording leads people
to typically better understand the message you're trying to convey.
Best Regards,
Khurrum Mahmoood
