Is Japan’s Financial Services Agency right in reducing maximum leverage caps?

Forex traders in Japan are bracing for tougher times ahead after the FSA (Financial Services Agency) decided to reduce leverage caps. FSA says this move will protect both new and experienced forex traders from making huge losses due to market fluctuations. The new maximum leverage cap is 10: 1.

Are you an Asian-based fx cfd trading investor? Here’s what you should know about Japan’s latest forex trading leverage limit.

Effects of the FSA’s new leverage policy on forex traders

 

  • Significantly reduced profits

 

Prior to the new law, forex traders enjoyed a maximum leverage of 25:1. If you had $5,000 dollars as the initial investment, you could trade with up to $125,000 dollars. The more capital you have, the larger your trades and frequency of trading. However, the new law will drastically reduce gross profits since the leverage ratio has dropped by 150 percent.

Here’s a brief illustration.

Assume your broker offers you a maximum leverage of 25:1. This enables you to trade up to $250,000 dollars if you deposit $5,000 dollars as capital. Assume you invest in a EUR short/USD long pair where the exchange rate is 1 Euro=1.2 USD and the trade amount is 100,000 Euros.

100,000 (Euros) X 1.2 = $120,000

At 100,000 your leverage is ($120,000/$5,000) = 24

Fortunately,  the Euro’s value drops in comparison to the U.S dollar dropped to 1.1 after one week, what would be your gross profit?

New Value = 100,000 Euro X 1.1 = $110,000.

Gross Profit = Selling Price – Buying Price

Gross Profit = $120,000-$110,000 = $10,000 dollars.

If you calculated the gross profit using the recommended maximum leverage cap, your total gross profit will be less than $5,000 dollars. When you subtract commissions and service charges, the net profit can be a source of discouragement.

 

  • Unfriendly margin deposits policy

 

The 150 percent reduction in maximum leverage caps means that forex traders will have to dig deeper into their capital reserves. Using the previous illustration on the Euro short/ USD, you notice that the trader manages to get leverage amounting to $120,000 dollars for just $5,000 dollars.

As per the new leverage cap policy, you’ll need a margin deposit of $12,000 dollars to receive an equivalent trading amount. This means that online forex traders trading in the Tokyo Stock Exchange Market will need to double their margin deposits by summer of 2018.

Since not every forex trader can comply with the new requirement swiftly, the new leverage cap creates an entry barrier to forex trading. Forex brokers will also increase their minimum margin deposits to compensate for the reduced number of forex traders. The high margin capital requirement may make it tough for hard-hit forex traders to make comebacks after suffering huge trading losses.

 

  • Increased borrowing of capital

 

Have you ever heard about forex trading loans?

In order to meet the recently adjusted margin deposit requirements, some forex traders will seek help from creditors offering forex trading loans. You’ll need to offer collateral and provide valid credit histories during the loan application process. Some forex brokerage firms only offer trading loans to their members and this can pose a challenge to non-members desperately looking for capital.

Borrowing forex trading loans is risky due to its largely unregulated nature of operations. You may come across lenders charging high double-digit interest rates while offering short repayment periods. In this situation, the forex trader will spend a huge portion of their profits repaying debt.

 

  • Exodus to cryptocurrency trading

 

After Bitcoin’s tremendous increase in value, some major securities exchange markets quickly took advantage and offered cryptocurrency trading. Apart from the financial securities sector, some real estate firms allow customers to purchase homes using cryptocurrency.

Now that cryptocurrencies have gained mainstream approval, forex traders will respond in two ways. Forex traders that are looking for higher returns will shift to cryptocurrency trading due to better leverage. The second alternative is reducing capital spent on forex trading and diversify to cryptocurrency trading.

 

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