Trading has been relatively quite ahead of the FOMC rate statement on Wednesday. I missed some decent GBP moves today, but managed to scalp the $1.06 USD/CAD round number. Total take for today’s trading was 31.2 pips, nothing too exciting but a profit is a profit. There is nothing on the long term horizon that looks interesting to me this evening. I suspect some fun over the next few days though, best of luck this week!

Howdy Traders,

This week’s video deals with a losing trade, the CFTC’s proposed regulations, and combining technical reasons to trade with fundamental reasons to trade. I hope your having a fantastic weekend, and best of luck next week!

Earlier this week the United States Commodity Futures Trading Commission (CFTC) proposed several new, and highly unpopular regulations aimed at off-exchange retail FOREX transactions. The proposed regulations are “important steps in implementing the additional consumer protections authorized in the 2008 Farm Bill” according to CFTC Chairman Gary Gensler. The off-exchange retail currency market, or FOREX market had been unregulated within the United States, but that changed when the CFTC Reauthorization Act of 2008 was enacted as Title XIII within the Food, Conservation and Energy Act of 2009, commonly referred to as the Farm Bill. The act sought to clarify and enhance the CFTC’s jurisdiction over off-exchange currency trading, and since then the CFTC has enacted a number of new regulations on the FOREX market. In 2009, the CFTC eliminated hedging, restricted margin to 100:1 and enforced first-in-first-out (FIFO) order execution. The latest proposal takes regulation to a new level, and many traders are expressing tremendous frustration with the CFTC’s entrance to off-exchange trading. Having read the 193 page proposal, I thought I’d weigh in on the matter in today’s post.

What’s In the Proposal?

There are several regulatory changes proposed, however one in particular related to leverage is receiving the most attention from FOREX participants. If you haven’t read the proposal, I encourage you to do so. You can find the press release and Federal Register via this URL:

http://www.cftc.gov/newsroom/generalpressreleases/2010/pr5772-10.html

Here is a link to the entire CFTC proposal:

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/forexrulesproposal.pdf

If you don’t have time to read 193 pages of government speak I’ll do my best to summarize them for you.

Registration Requirements

Under the proposal, trading counterparties (dealers) offering retail foreign currency contracts would be required to register as either futures commission merchants (FCMs) or retail foreign exchange dealers (RFEDs).  I don’t think most people will have a problem with this, for years I’ve recommended doing business with dealers who have voluntarily registered as FCMs with the NFA. All the major dealers in the United States have already done so. Along with dealers, anyone who solicits orders, executes trading authority or operates pools with respect to retail forex would be required to register as a commodity trading advisor (CTA), commodity pool operator (CPO), introducing broker (IB) or as associated persons of a registered entity.

I personally welcome these registration requirements. I remember the onslaught of enforcement action notices the CFTC sent out during 2008 and 2009 as they busted one currency related ponzi scheme after another. It made me sick to see so many people taken by dirt bags who used the unregulated currency market as their play ground to open questionable managed funds.  The off exchange currency market has been a playground for scammers who promise huge gains, with little risk, without oversight for too long. If you want to manage people’s money in the FOREX world, or introduce them to do business with a specific dealer, I think it’s about time you get registered.

Capital Requirements

Under the proposed regulations registered FCMs or RFEDs would be required to maintain a net capital requirement of $20 million, plus 5% of any amount they are liability to retail forex customers exceeding $10 million. This requirement is aimed at shoring the financial stability of dealers. For most major dealers in the United States this requirement will not be a big deal. The only major dealer who had people concerned about their net capital levels was Interbank FX, but they appear to have shored up that issue. The CFTC reports on FCMs financial strength monthly with the last report posted on November 30^th, 2009.  Using the latest CFTC report, the net adjust capital of major currency dealers operating within the United States is listed in alphabetical order below.

Clearly Interbank FX is still on the lower end of the net capital requirements, but above the $20 million minimum. However, several currency dealers on the FCM financial list do not meet the $20 million minimum capital requirement, and will presumably be unregistered as FCM’s if they are unable to increase their net capital balance should these rules be put into place. I highly encourage you to monitor the financial data of your currency dealer. If your dealer is below the line, you should consider moving to another FCM registered currency dealer. You can find the report at this URL:

http://www.cftc.gov/marketreports/financialdataforfcms/index.htm

Disclosure Requirements

Under the new proposed regulations all retail forex counterparties and intermediaries would be required to “distribute forex-specific risk disclosure statements to customers, and comply with comprehensive recordkeeping and reporting requirements”.  I see no threat to the retail trader in that proposal. It should be no surprise to anyone in this business that currency trading; off-exchange is one of the riskiest forms of trading available in the retail financial markets. Regardless, there is always someone who needs to hear the warnings.

Margin Restrictions

Finally, the proposal that has the currency trading community in fervor is related to margin requirements. Under the proposed regulations, all retail forex customer accounts in the United States would be subject to a maximum leverage of 10:1. This means a vast majority of retail currency traders would suffer a ten times increase in their margin requirements, assuming they use 100:1 leverage. In plain terms, if you use 100:1 leverage you are able to control a $100,000 standard sized currency lot with $1,000 in your margin account. At 10:1, you must maintain $10,000 per standard lot. The same holds true for micro and mini accounts, where I would wager most retail currency traders are trading these days. Under 10:1 leverage a trader would need to maintain $1,000 for every $10,000 mini lot, or $100 for every $1,000 micro lot traded. The increase in margin will also translate to a decrease in pip value, modifying the overall profit and loss per pip on every trade. The CFTC’s seeks to reduce the damage a trader can do to their capital by reducing the leverage available to them, all in the name of consumer protection. Traders however, are expressing a “leave me alone, I can handle it” attitude toward the proposed change.

Is this the Death of Retail Currency Trading in the United States?

Francesc Riverola, CEO & Founder of FXStreet.com, and many of my fellow bloggers at FXStreet.com have been very outspoken over the proposed change to margin requirements by the CFTC. Francesc correctly pointed out in a recent blog posting when he wrote:

“CFTC to Kill US Retail Forex Market

How do they pretend traders not going offshore and forcing to close their doors to all US FDMs by limiting leverage 10 to 1???? while overseas you can have much bigger leverages like 200 to 1 in UK????”

- Francesc Riverola

Major currency dealers are so concerned the margin requirements will kill retail trading in the United States; they have formed the Foreign Exchange Dealers Coalition (FXDC) to provide a unified front in Congress. The Coalition released a statement against the CFTC’s proposal which can be found by clicking here. The statement clearly lays out a case for retail currency trading in the U.S. as a $1 billion industry, providing solid jobs, growth and their concern the margin change will drive small retail customers offshore. The result will be less fraud protection for the retail trader, a loss of jobs in the United States, and no significant gain in consumer protection as a result.

Where do I Stand on This?

I encourage the CFTC’s effort to reign in the actions of unscrupulous currency dealers, IB’s and money managers. If you want to manage money, or execute authority on a clients account you should be registered. I also believe the capital requirements are necessary and ultimately weed out weak dealers from the business. Perhaps this will limit consumer choice to a few big dealers, but I believe the protection offered is worth it. I’ve been around long enough to remember the REFCO FX debacle.

Regarding margin requirements, I am adamantly opposed to the proposed restrictions. I believe in personal choice, and personal responsibility. If you do not understand the damage you are a capable of doing through the use of high leverage, you should not be trading. It is your responsibility to understand the market you are participating in, practice diligently and protect your capital before placing a single dollar at risk. If you trade without regard to the risks, and lose your shirt, it’s your fault. Regulating the leverage available across the board punishes everyone in the name of protecting the lowest common denominator among traders, and that frustrates me. I go out of my way to warn traders about the risks of trading on margin, and so will any reputable FCM, IB, CTA or CPO. Unfortunately, even if you lead a horse to water you can’t make it drink. Even at 10:1 leverage there will be traders who blow out their accounts, some people never learn. I do not want my choice of leverage limited in the name of consumer protection. There are many retail traders who have jumped ship overseas already, and I may follow them if these regulations are enacted.

I believe these proposed changes, if enacted will actually have a negative net affect on retail currency traders. Instead of protecting the consumer, the CFTC’s actions will drive small volume retail traders to overseas dealers where leverage can be as high as 700:1! There are also unregulated dealers overseas who will take advantage of retail traders seeking 100:1 leverage. The Foreign Exchange Dealers Coalition is correct in their statement saying:

“Unregulated dealers from around the world will also be the beneficiaries of the 10 to 1 leverage rule. These unregulated forex dealers don’t have to worry about capital requirements, risk management models, marketing ethics, dealing practices or even returning a customer’s funds. These dealers will be out of the reach of the CFTC and they will thrive.”

FXDC Statement against proposed 10:1 leverage restrictions

How Can You Comment?

If you would like to comment on the proposed changes, I highly encourage you to contact the CFTC within the next fifty days and voice your opinion. Ensure you identify your comments with the regulation number RIN 3038-AC61. You may submit your comments to:

secretary@cftc.gov

Include “Regulation of Retail Forex” in the subject line of your email.

Additionally, you can submit your comments via mail at the following address:

David Stawick, Secretary, Commodity Futures Trading Commission

1155 21st Street, N.W.

Washington, DC 20581

All the comments received by the CFTC will be posted without change to http://www.cftc.gov, including any personal information provided in the comment.

The Bottom Line

I can’t stress the importance of letting your voice be heard. If you do not want your margin requirements to increase, if you prefer flexibility with leverage, I suggest you speak up now or be prepared to trade with 10:1 leverage in the near future. Your only other alternative will be to increase you capital, or go overseas.

I hope you had a great week of trading, and have a great weekend!

Ryan

Canadian loonie lost ground against the United States dollar and Japenese Yen today following mixed fundamental data, and a drop in oil. The market consumed data from Canada’s housing sector as well as the Bank of Canada’s Business Outlook Survey, which is released quarterly. The fundamental data was mixed and speculation over Canada’s economy recovery continued, especially after last week’s disappointing employment data. Canadian building permits fell -4.6 percent in November versus an expected fall of only -2.6 percent, a decline attributed to decreases in non-residential building permits. Meanwhile, residential permits rose 9.1%. CAD’s losses put the currency into an area I refer to as bargain hunting territory, giving me something to ponder for today’s post.

Taking a holistic look at CAD, the fundamental and technical pictured combined isn’t that bad. The business survey points out that more than 70% of firms surveyed expect their sales volume to increase over the next twelve months. Other interesting tidbits from the survey include the following:

• 42% expect higher machinery and equipment spending.
• 54% expect their employment levels to be higher.
• 42% expect prices of products or services purchased to increase.
• 38% expect prices of products or services sold to increase.
• 61% expect an inflation rate of 1 to 2 percent.

The inflation data is interesting considering almost half of the firms surveyed believe their cost of goods sold will increase, but only 38 percent expect to pass that on to the consumer.  The Bank of Canada points out that while firms expect output prices to grow at a faster rate than the last twelve months, some firms may have trouble increasing prices to match the higher cost of goods.

“On balance, firms also expect their own output prices to grow at a faster pace than over the past 12 months. For many firms, this reflects the end of a period of price discounting, as they plan to keep prices stable or try to partly reverse past discounts to restore profit margins. Some firms plan to pass on part of the higher cost of inputs to customers, although, for others, the ability to raise prices is limited, given soft market conditions.”

-          January 2010 Business Outlook Survey, Bank of Canada

Overall, the survey suggests that Canadian executives are rather optimistic about the next twelve months.

Sweet, Sweet Crude

Another interesting chart related to Canadian dollar is the West Texas Intermediate Crude daily chart. Last week WTI broke through resistance at $82, and today $82 is being tested as support. Should $82 hold and oil continue higher, loonie may benefit.

Data on Tap

Tomorrow Canada will see Trade Balance data, which is expected to show a positive gain. The market also expects to see trade data from the United States which makes me more interested in CAD/JPY than USD/CAD today.  Both USD/CAD and CAD/JPY have moved into what I call bargain hunting territory, but CAD/JPY would be free of fundamental influence from the dollar. Trading cross pairs to remove fundamental pollutants is something I talk about in my book, Making Money in Forex. The next twenty four hours could provide a decent example of this process in action.

Of course, I could be totally wrong. It is hard to ignore the speed of today’s CAD/JPY sell off. Today’s price action wasn’t a meandering Sunday stroll into bargain hunting land, rather it was fierce 100 pip slaughter fest taking only five hours to fall.

Best of luck,

Ryan

Stop losses are an effective tool for managing risk, but placing stops incorrectly may take you out of a good trade too early. Stop losses should protect your account from risk, but only when your trade idea is truly broken by price action. Additionally, traders often assume, larger time frames require large stop losses which simply isn’t true. In this weeks trading video,  I demonstrate a few simple tips to improve your stop placing skills.