The Sensible Guide to Forex: Safer, Smarter Ways to Survive and Prosper from the Start

APPENDIX D

More on Leverage and Margin

As the retail forex industry has developed and expanded since its beginnings in the mid-1990s, so too have regulatory controls, as governments seek to protect the unwary from unscrupulous or what they deem excessively risky leverage limits. Leverage limits vary with time and place.

For example, as of October 18, 2010, U.S. retail forex brokers are limited to 50:1 (2 percent margin) leverage for the most liquid currencies, the majors, and the more liquid crosses, and 20:1 for the exotics. While this may seem positively sedate compared to the 200:1 to 400:1 offered in many places outside the United States, compared to the 2:1 (∼50 percent) margin offered by most equities brokers, the greater risk and reward offered U.S. forex traders is still substantial, and still demands careful RAMM practices.

Note, however, there is a loophole that allows SEC/FINRA-regulated brokers (like Citi, Deutschebank, etc.) to keep offering higher leverage to retail forex trading regardless of these regulations, therefore becoming potentially more attractive to forex traders than CFTC forex brokers (like FXCM, IBFX, etc.).1

There is some confusion surrounding the classification of “majors.” In common Forex jargon, the majors are only the seven pairs mentioned in Chapter 2. However, as far as the new rules go, the majors are all pairs which include any two of the following currencies:

• U.S. Dollar (USD)
• British Pound (GBP)
• Swiss Franc (CHF)
• Canadian Dollar (CAD)