Sunday, August 26, 2018

New: Currency Strength Indicator

I've just created a new Currency Strength Indicator (CSI). More details about it here.

This new indicator, is actually outwardly similar to the Currency Strength Meter (CSM), but it was completely redesigned for efficiency and architectural reasons. It also now has functionality which was only previously available with the Currency Index (CI) indicator, and as such can be seen as a combination of these two indicators.

The Currency Index, is however, highly optimised and remains the best option if just a single currency index is require to be displayed on the chart.

There are a few minor features that did not make it from the Currency Strength Meter, including the correlation study (which I might still add at a later date).

Although, this is technically a "new" indicator, I'm allowing existing Currency Strength Meter licenses to be used since it is so similar.

The legacy Currency Strength Meter will no longer be developed, but it remains functional, and can still be obtained on request if it is really required. However, apart from the few minor features that are missing, the new Currency Strength Indicator is superior to the Currency Strength Meter in most ways.

Thursday, August 23, 2018

ESMA rules on Binary options, Forex and CFD trading

New Rules

Since 31st July 2018, new rules relating to Binary options, Forex and CFD trading have come into play.

See here for details on the changes from EMSA.

In summary:
  • Binary options
    • A prohibition on the marketing, distribution or sale of binary options to retail investors
  • CFDs (including rolling spot forex)
    •  A restriction on the marketing, distribution or sale of CFDs to retail investors. This restriction consists of: leverage limits on opening positions; a margin close out rule on a per account basis; a negative balance protection on a per account basis; preventing the use of incentives by a CFD provider; and a firm specific risk warning delivered in a standardised way.

The leverage limits are:
  • 30:1 for major currency pairs;
  • 20:1 for non-major currency pairs, gold and major indices;
  • 10:1 for commodities other than gold and non-major equity indices;
  • 5:1 for individual equities and other reference values;
  • 2:1 for cryptocurrencies;

  • A margin close out rule on a per account basis. This will standardise the percentage of margin (at 50% of minimum required margin) at which providers are required to close out one or more retail client’s open CFDs.

These new rules affect all retail forex / CFD traders using brokers in EU.

So, what does all this mean?

Basically, you require more money in your account to open and maintain positions than you did prior to 31st July 2018. Quite a lot more, for example: under the old rules a 10K position on EUR/USD would have required £50 (assuming 200:1 leverage) it will now require £333.

Furthermore, since you need to keep the used margin level at least 50% (e.g. 60-70% would be more comfortable) then the account size required for a 10K position on EUR/USD would be about £1000+. This is of course, per 10K position; if you plan to trade bigger positions or multiple trades, then the account size should be increased accordingly.

For stock indices, it is even worse (only 10:1 leverage allowed).

(In these examples, £ was used, but similar numbers can be assumed depending on whatever currency the account is denominated in).

Go "professional"?

The new ESMA rules only apply to retail traders. If you meet certain requirements, then you can declare yourself a "professional" trader. The requirements to pass this bar may vary, but typically are something like the following:
  • Have you traded leverage derivatives in significant sizes over the last four quarters?
  • Do you have a financial instrument portfolio exceeding €500k of liquid assets?
  • Have you worked in the financial sector, in a professional position requiring knowledge of derivatives trading, for at least a year?

As a "professional" trader you will be eligible for the higher leverage rates (i.e. back to 200:1 for forex), but you do potentially lose certain protections offered to the retail trader. See this interesting article on it.

Go offshore?

Finding a broker outside of EU jurisdiction is another possibility of course, but I suspect this will also mean the loss of some financial protection.

Trade smaller and smarter?

FXCM offer micro-lots (i.e. 1K lot size rather than the more standard 10K lot size). Thus, it is possible to simply trade smaller rather than increasing account balance to cover margins. For example, a 1K position on EUR/USD requires only £33 for margin.

Of course, smaller trade size means profits and losses will be a lot less too. I notice that FXCM are actively advertising with this in mind now (even although micro-lots have been available for a number of years already).

I'm also looking at smarter trading strategies, for example being much more selective on which instruments to trade, and keeping a good handle on used margin. Some automation should help here.

Post Brexit?

Who knows, perhaps EMSA rules will not have to be adopted in a post-Brexit world!

Thursday, August 2, 2018