The report by the Bank of International Settlements (BIS), says that over 40% of the global trading volume in the forex markets comes from the UK. While most of the trading is institutional & from banks, the participation by retail traders in growing.
Retail Forex trading in the UK is legal. If you are a retail trader it is important that you understand the regulatory framework, the risks involved, to ensure the safety of your funds.
The regulatory agency with the responsibility of overseeing forex trading in the UK is the Financial Conduct Authority (FCA). Brokers who wish to accept UK based traders must obtain the relevant license from the FCA.
Also, retail traders must know that as per many experts, as high as over 90% of retail forex & CFD traders lose. This number is quite alarming & indicates that 9 out of 10 retail traders will lose their money.
But even with the warnings, the number of retail traders trading at CFD brokers continues to grow. With these facts we want to cover important points about forex trading & its risks for retail traders.
Fact 1 – Leverage increases your Risk of Losses
In a simple term, leverage trading can be defined as the ability to gain control over a large amount of money in the forex markets. With leverage you can borrow capital from your broker, with a view to gaining a larger exposure in the forex market, with a comparatively small amount of funds.
In some countries, there are no limits or restriction on leverage for CFD trading. The position of leverage trading in the UK is different because the FCA has placed restrictions on how Contract for Difference CFDs and other similar instruments are operated, for the safety of retail traders.
One of the restrictions states that CFD brokers in the UK cannot offer leverage that is more than 30:1 to retail traders for forex, and lower for CFDs on other instruments like cryptos, commodities and CFD- like options.
The development means that for every $1 that a forex trader has in his trading account, he can trade $30 as a retail forex trader using CFDs.
High leverage can result in excessive losses for traders trading in a volatile market. If you are using 1:30 leverage, then even a 3.33% movement in price of an asset against your direction will result in ‘margin call’, and complete loss of your trading capital.
Since high volatility instruments can easily more 4-5% or even higher on a volatile day, the risk for retail day traders is excessive. So, the restriction on leverage is very important to protect the retail traders from excessive losses.
Fact 2 – Negative Balance Protection (NBP) is compulsory for UK clients
NBP ensures that traders don’t fall into debt. It is one of the systems put in place to protect the interests of retail forex traders.
According to the FCA, NBP is one of the policies initiated to: “Provided protections that guarantee a client cannot lose more than the total funds in their trading account.” As the name implies, the measure prevents the balance of traders from falling into a negative zone.
Let’s assume that you have $1,000 in your trading account and leverage your trading position by 1:10. It means with $1,000 you can control currency worth $10,000. This implies $1,000 is your initial capital, while your broker lends you the balance of $9,000.
Assuming now that the market moves in a negative trend and falls 15%. The result of the unfavorable trend means you have lost $1,500. However with NBP in place, you will lose only your initial capital of $1,000 and not owe your broker $500.
With the adoption of NPB, retail forex traders need not worry about getting into debt, regardless of how massive uncertainties in the market are
Fact 3 – Margin-stop out Level is 50%
Margin can be defined as the amount of money that your broker requires you to deposit into your account, to open a trading position.
Margin level on the other hand can be defined as the ratio between the available and locked up equity; which is the used margin. Margin level is expressed in percentage. Traders are always careful so as to prevent it falling below 100%.
The total amount of money you have in your trading account is referred to as Equity. It is from this equity that you take out money to open trading positions. If your equity is $100,000 and you want to open a trading position that requires an initial margin deposit of $20,000 it means your new available equity be reduced to $80,000. It is from here that you calculate your margin level
The formula for determining Margin Level is: Margin Level = (Equity / Used Margin) x 100
In this example, after taking out $20,000 to open a position,
Margin level will be ($100,000/$20,000) x 100 = 500%
If it has reached the stage where it falls below 100 % (but not up to 50%), the broker would resort to what is called a “margin call”. This means you would be required to fund your account, and you will not be able to open any new positions.
The need to initiate the Stop Out now occurs when your margin level falls to 50%. This is the point where your trading position automatically reaches a Stop Out level in U.K. Forex trading, according to FCA rule. This stage connotes that your trading activities will be automatically closed at market price.
It is part of the FCA polices, geared towards protecting the interests of the retail traders. This is because when you continue to experience losses, it will be like an unpaid loan which would be very injurious to your trading plan.
Fact 4 – Brokers are required to put up CFD Risk Warnings
FCA regulation requires that CFD brokers in the UK state what percentage of clients’ accounts lose money while trading CFDs and other similar products. the notice is put up on the brokers website.
This list of top UK forex brokers by Safe Forex Brokers tracks the percentage losses at the major retail forex brokers. As per this research, a majority of the retail traders lose, and the percentage of losing traders is as high as 83% at some of the reputed forex & CFD brokers.
The FCA rule says: that the purpose of the publication is to “Provide a standardized risk warning, telling potential customers the percentage of the firm’s retail client accounts that make losses.”
By having access to the statistics of client accounts that lose money, the potential traders and Investors would see the realities of the instruments.
Making the U.K. potential traders see the historical performance of the products is a warning that they are very risky. It should be noted that as the brokers disclose these statements on their U.K. websites, they don’t disclose it on their websites in other countries that don’t have this requirement.
Fact 5 – Forex Market is not liquid 24/7
Retail forex trading has no fixed hours for trading activities. Forex market is opened for operations 24 hours a day, five days in a week.
While one part of the world is asleep, the other is awake so there are four trading sessions, depending on the region which is trading. The trading sessions are:
- Sydney session- 10pm till 5am
- Tokyo session- 11 pm till 8am
- London session- 7am till 4pm
- New York session- 12noon till 8pm
For UK-based traders, the London session is important as there is high liquidity.
Also, the London and New York sessions coincide between the hours of 12 noon and 4pm. According to data, these sessions are the most active & have the highest liquidity & volatility. The reason the liquidity is highest during these sessions is because the participants from the UK and the US are the biggest players in terms of trading volume.
There are major Risks Involved
Trading in the forex market is extremely risky for retail traders & there is a high probability of losses as indicated by the risk disclosures at the retail forex brokers in the UK.
The retail traders who are trading or considering trading in the FX market, it is very important to be aware of the risks involved, and understand that you can lose your trading capital.