DrinkForex is a candid video podcast highlighting the forex industry with leading and emerging professionals. We discuss and debate horrible failures, great successes, and everything learned in the process.
As you may be aware, the European Securities and Markets Authority (“ESMA”) has confirmed that new measures and restrictions must be implemented for retail investors trading FX, CFDs and Spread Bets by August 1, 2018. These changes most notably impact trading leverage, margin stop out rates and negative balances. Below are the major impacts that ESMA is going to have on your trading.
With these changes going into effect though it is important to truly understand what impact they are going to have on your trading. Chances are, not much!
Leverage Limits on New Positions
From August 1st, 2018
30:1 leverage for Major Currency Pairs
20:1 leverage for Non-Major Currency Pairs, Gold and Major Indices
10:1 leverage for Commodities (Not including Gold and Non-Major Equity Indices)
5:1 leverage for Individual Equities
2:1 leverage for Crypto Currencies
Impacts - Most people do not really understand leverage. They read 500:1 and automatically think that they are trading with that much leverage. In reality that is the amount of leverage they are afforded and typically they don't actually use that much leverage. Think about it, if you have a $1,000 in your account and you place a 0.01 lot of EURUSD, you are only using 1:1 leverage. With the new rule changes on a $1,000 account you would still be able to place 0.30 lots of EURUSD. Chances are this is more size than you are currently trading at the moment on that size of account.
Margin Stop Out Rate
From August 1st, 2018, all brokers are required to have a 50% margin stop out rate. This means that if your margin drops below 50% of the amount required to maintain your current portfolio, your broker will begin to liquidate your positions.
Impacts - If you are a hope trader then maybe this is going to have an impact. What I mean by that is, hope traders hold on to trades until they are either liquidated because they don't have enough margin or the trade comes back into being profitable. If you are a hope trader then this may have some impact as your trade isn't going to be able to go against you as much if you broker had the margin stopout rate below 50%. Most brokers though have always had the stopout rate above that amount as they risk a client going debit if it is under. If you practice sound money management and risk techniques this won't impact you much. For more on sound money management techniques we would suggest downloading the free guide from Jason Sen by clicking HERE.
Negative Balance Protection From August 1st, 2018, negative balance protection will be implemented on a per account basis, providing an overall guaranteed limit of retail client losses. Should an account go into negative equity, your broker will make the necessary adjustment to the account.
Impacts - Ultra POSITIVE for you as a retail trader. What this means is that in no way can you lose more money then you put into your trading account. I.E. if you deposit $1,000 you cannot lose more than $1,000. In the past this was not the case, for a clear example Google Swiss National Bank Incident debit balance.
Professional Status Professional clients can opt out of these new regulations.
Impacts - If you qualify as a professional trader then this may have some impacts. First, if you elect to become a professional you do not have to abide by the above rules. You are free to trade at any leverage your broker offers. But, and that is a big but, you are giving up a lot of protections. You no longer have the negative balance protection, meaning that if you go debit that broker can and most certainly is going to come after you for repayment (because they know you have money as a professional trader). Also, in the unfortunate event that the broker goes bankrupt you are going to be fighting with creditors to get your money back. This is because your funds are not segregated and do not have the same protections that retail investors are afforded, such as the FSCS in the United Kingdom that all FCA regulated brokers must participate in. In this financial scheme in the event that the broker goes bankrupt retail investors are protected up to 50,000 pounds in their trading account.
So, before you go declaring yourself as a professional trader you may want to consider whether or not it is in your best interest.
One last point of note before we wrap up is that this impacts EVERYONE who is trading with a European regulated broker. So, if your broker is regulated by the FCA, Bafin, Cysec, etc. you are going to be impacted by these new ESMA regulations. The time to act is now before the regulations go into place. Review your account, see if you are going to get impacted, and if so start looking for brokers that don't fall under these regulations.
Practically every trader faces a situation where they must think about whether they want to be a manual discretionary trader, go fully black box automated trading, or a grey box combination of both. The trust is that there is not direct clear answer, as both styles have proven to work effectively overtime for many traders, and both have their own pros and cons. Below we discuss some of the pros and cons of manually trading vs. automated trading.
Pros Full control over your transactions. You can mange your orders in real time, if you feel the market is doing something out of the ordinary and you don’t have to wait until an automated system updates your trade, you can do it in real time.
You are much more engaged in the markets when trading manually. This allows you to get more familiar with trading, the markets, and overall allows you to become a better trader. There is a reason that many large prop firms in the world pair great traders with computer programmers. The fact is most computer programs don’t understand markets and they need the experienced traders who have traded manually for years to explain the markets to them to improve their automated strategies.
Manual traders tend to annualize the markets more closely.
When manually trading you can factor Fundamental analysis into your decision making. Most automated strategies cannot handle Fundamental tools, they strictly rely on Technicals. This can cause some strategies to lose unnecessary money. By way of example, let’s say Non-Farm Payroll was just released and the figures are very bearish for EURUSD. You are currently in a long position with a stop 100 pips away at a moving average. If you are manually trading, you can simply exit this trade and save yourself 100 pips. If your system is fully automated though you must wait until the markets go down 100 pips and stop you out, effectively costing you 100 pips for no real apparent reason.
Manually trading requires a lot of market knowledge, which can take years to master. Trading is like any other profession; the vast majority of people are not going to be experts overnight. They must spend the time to analyze the markets, test different strategies to see what works for them, and spend screen time honing their skills.
When manually trading you must always be in front of your screens, whether it is on a computer, tablet, or phone, you must be in front of the screen. Because let’s remember there is no automated system that is going to place the trade for you. You must manually enter and exit every trade, which requires you to be present.
Emotions and psychology are a critical component to trading manually. Many traders have large mood swings when they are making or losing a lot of money. This can work in your favor, but often it works against manual traders. It is best to be as unemotional as possible when trading manually.
A wrong attitude to trading can lead to great losses. It’s not gambling, but a serious business. Unfortunately for many new traders though they treat it like gambling and as a result lose their money. It is best for new traders to start trading using a demo account. Demo accounts will allow a trader to learn the platform and markets without risking capital.
One of the single greatest advantages of using an automated system vs. manually trading is the fact robots don’t have emotions. There are no scared emotions to keep you out of a trade or exit a trade early, there is no emotional greed to make you believe you can take more profit then when is available in the market, and there is no hope emotion that doesn’t allow you to exit a losing trade in the hope that is going back into your favor. Your automated strategy is going to perform exactly how you programmed it to perform when there was no emotion involved.
You are not required to be around your computer 24/7. Once you have built your robot and installed it on your trading platform the robot can simply run without your presence. This frees up your time to focus on other projects or develop additional automated strategies.
Pending a glitch, automated strategies always perform exactly how the predetermined tactics were setup.
Automated strategies can react to market news much faster then a human. There is a reason why the vast majority of high frequency trading is done via an algorithm. These algorithms are often co-located next to the liquidity provider or exchange and can execute orders in milliseconds. A human typically cannot take in the data and react manually for several seconds. This can allow automated strategies to get in at better prices in the market.
Technical analysis is the main resource of most automated strategies. Most automated strategies traders use cannot handle fundamental news. They purely look at prices and chart patterns to make their trading decisions.
There is not much flexibility. One robot works with one strategy only. If you want to run multiple automated programs you must open multiple accounts. This requires more administrative work on your end as you need to move money around between different accounts as strategies either make or lose money.
In the beginning automated strategies require a lot of focus and attention. Effectively you are giving control of your account over to something that you or someone else developed. It is important that you monitor the activity early on to make sure that it is performing exactly as it was designed to perform. Otherwise you risk your account blowing out!
Having high speed internet connections and computers are paramount to most automated strategies being profitable. Often times traders will purchase a VPS (virtual private server) and install their robot on that. This allows them to be co-located to their liquidity provider, have a fast and stable internet connection, and reduce latency of trade execution.
There are a host of scammers selling out of the box automated strategies online. This can lead many new traders to purchasing one without fully understanding what they are doing. As mentioned above you are effectively giving control of your account to the system. So not only do you risk losing what you paid for the robot, but you also risk losing your entire account. By way of example if you pay $100 for the robot and have an account of $1000, you risk losing $1100 by using the software. For this reason it is important to fully do your research before ever purchasing an automated system.
These are just some of the pros and cons of trading manually vs. automated. It is important for traders to find what works best for them. Just like not every forex broker is the same, neither is every trade. Each trader is going to have a unique skill set. These variable skill sets mean that while one trader might be better suited for manually trading, another trader might be better suited for automated trading. The key here is that you should do your own research and practice in a demo account if you are trying something new.