The Best Tool Every Forex Trader Can Have Is The Truth

Well the folks at our beloved NFA (National Futures Association) have done it again. The Forex Market scene is undergoing some major changes that you definitely need to know.

The maximum amount of leverage ratio allowed by brokers registered with the NFA is going to change from 400:1 to 100:1
Wow what a change!

Now this has a pretty big impact in the way you trade because as of November 29th 2009 you are going to need 4 times more money to be able to sustain the positions you are accustomed to operate, depending of course on your style of trading.
So it will be something like this:

PRESENT DAY

Leverage limit ratio of 400:1

Lets say you have a mini account, which offers a 400:1 leverage ratio. So in order to have a position in which a Pip is worth $ 1 you need to have a margin (deposit) of $25

In other words If I leave a deposit (margin) of $25, the broker will lovingly leverage my deposit (margin) 400 times. Which has a market value of $10,000 ($25 x 400). In the pair EUR/USD the pip value is .0001; if the exchange rate is 1.4979 and it goes down to 1.4978 it has gone down .0001. Now this means that every pip has a value of .0001 of my $10,000, which results in $ 1 ($10,000 x .0001).

AFTER NOVERBER 29TH 2009

Lets take the same scenario and see how this will affect us on a limit leverage ratio of 100:1

You have a mini account, which now offers a 100:1 leverage ratio. If I place the same $25 as deposit (margin) now a pip value will only be $ 0.25

In other words If I place a deposit (margin) of $25, the broker will now leverage my deposit 100 times. This means my position has a market value $2,500 (0.25 x 100). In the pair EUR/USD a pip is worth .0001 remember?. So again every pip has a value of .0001 of my $2,500, which results in $ 0.25 ($2,500 x .0001)

What if I want to trade the same way?

How does this new leverage limit work, if I want to continue operating with Pips that have a market value of $ 1.00?

So back to our example of a mini account that now offers a leverage ratio of 100:1 if you want to open a position in which a Pip is worth $ 1 you will now need a deposit (margin)
of $100

In other words If I place a deposit (margin) of $100 the broker will leverage my deposit 100 times. Therefore my position has market value of $10,000 ($100 x 100). Remember with the EUR/USD pair, every pip is worth .0001 of my $10,000 which ads up to $ 1 ($10,000 x .0001)

In summary, what’s going to change after November 29th 2009, is the amount of money needed to place a deposit or margin to open operate. Which now have to be 4 times greater than what we are used to at the moment.

Gains and losses will remain the same; it all boils down to how much skin you have in the game.

Weather this is a positive or a negative change for the market is a debatable subject, what is not debatable is the impact it will have in your trading style.
If you were accustomed to trade with highly leveraged accounts, than you might want to run the numbers before you place another position other wise you will get a nasty “margin call” surprise.

Hope this helps to clarify this important NFA change to the forex.  Glad to be of service.
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