Using borrowed money to speculate on the financial markets is a risky activity. Most investors don’t have good risk management skills, and have a hard time understanding how quickly a position can wipe out their capital. New regulations from the European Securities and Markets Authority (ESMA) will make leveraged trading safer for everyone.
Since macro-trading first became popular for retail traders in the late 1990’s, there have been a lot of new brokers popping up around the world. Many of them offer leverage of up to 500:1, which means that for every 1 unit of currency, the broker will give the client 500 units to trade with.
It is easy to be blinded by dreams of making a lot of money quickly with borrowed money. More often then not, leveraged retail accounts end up going bust, or even owing the broker money from a losing position that the trader held for too long.
The ESMA Regulations Will Increase Safety
The ESMA recently announced that effective from July 30 of this year, there will be a number of changes for any broker who is regulated by EU laws, and offers leveraged investment products to retail investors.
The bottom line is that the amount of leverage that brokers can offer is dropping, which means that investors won’t be able to take on the same amount of risk. The new regulations state that the initial margin to open a position can’t be lower than 20:1, and that CFDs that represent commodities and indices will also be subject to much lower levels of leverage.
These new laws will apply to just about any leveraged product, including CFDs and FOREX trading. The new ESMA regulations will also prohibit any kind of offer that incentivizes trading, and will require that brokers close out positions when a client runs out of margin.
A Million Macro Traders
When macro trading first came on the scene in the 1970s, only professional traders had access to the markets that allowed speculation in FOREX and commodities. That has changed over the last 20 years. Now, just about anyone can open up an account at a broker who will give them high levels of leverage.
Many regulators require that brokers disclose the percentage of their clients who lose money. In most cases, retail FOREX traders and CFD traders lose money (usually around 80%). The real problem comes in when a trader doesn’t understand how to use stop loss orders, or takes a ‘buy and hold’ mentality with a highly leveraged trade.
The new ESMA regulations will remove many of these risks from the EU’s leveraged investment market, and put anyone who deals with an EU regulated broker in a much safer position.
Still Want to Take Huge Risks?
While the new regulations that ESMA is putting in place are probably a great idea for any trader (using 500:1 leverage is financial suicide) there are still numerous brokers that are outside of the EU who will offer their clients high levels of leverage.
It is a very good idea for any trader to understand how to limit their losses, and not get into a position where a single trade wipes their entire account out in a matter of minutes. Great macro traders like Paul Tudor Jones put a large emphasis on risk management, which is something everyone can benefit from.
The new ESMA regulations seem to be taking this trading philosophy to heart, and making sure retail brokers in the EU offer their clients an attractive risk/reward profile.