Wednesday, July 8, 2009

New NFA rules for Forex Traders

I was going to comment on this as soon as it hit my inbox, but I wanted to make sure that I fully understand the changes in the trading rules before I do so.
A few days ago I received an email from my broker letting me know about the new regulations that the NFA (National Futures Association) has imposed on them and other national Forex brokers.
Here's the excerpt;

Dear Client:

A major new National Futures Association (NFA) rule goes into effect on August 1, 2009. This rule affects all U.S. regulated Forex Dealer Members. Forex traders will no longer have the ability to place stop-loss or limit orders. Nor will traders be able to modify or close trades from the “Open Positions” window. As these features will be removed, all stop-loss and limit orders held on FXCM LLC accounts at the close of trading on July 31, 2009, will be deleted.

FXCM has always encouraged active risk management through the use of stop-loss and limit orders. Stops and limits are two entry orders that are linked to an individual open position. If a stop or limit order is triggered then the other is canceled. FXCM has introduced a new feature called OCO (One Cancels the Other) entry orders, which will provide traders with the same functionality as stop and limit orders except they are not linked to any position.

My first reaction was of course upsetting, the removal of stop-loss and limit orders?!?!, how else are you able to manage risk?? And right away they were talking about the ability to transfer your account to the UK version of FXCM if you wanted to continue these features.
The NFA is supposed to regulate and protect the investors, so how bad can it really be.

As of August 1st 2009 you will no longer be able to use;

- Hedge
- Place stop or limit orders
- Modify or close trades from the 'open positions' window

Ok, I never cared about Hedging in Forex trading and always thought this was the most useless and dumbest feature ever. Why would you pay your broker twice for the same pair, good for your broker, they make a lot of money off of you, not so good not for you. I got a little nervous about not being able to place stop or limit orders, a feature I use, and many others, to manage risk, same is for not being able to modify or close trades you already have. How else would you bail out if a trade goes the other direction then you wanted to.

It turns out it's not so bad after all and actually the Forex markets are being adapted to something that is already very common in futures trading. FIFO, First In First Out. The order you put in first is the first one to go out. You see, at the moment (and what is going to change after Aug 1st) you are able to have for example 3 open orders and close the last order you've made. After Aug 1st you have to close the first order you've made, then the second and then you can close that last one.
Another one is going to be OCO, One Cancels Other, which is in a simplified explanation nothing more then putting in a trade and putting in another trade right after going the opposite direction of your entry trade. For example you buy 100 EUR/USD @ 1.3850, then you can put in a sell of 100 EUR/USD for 1.40 for example (this is like your stop-loss).

My trading platform (and all the others) will be different after August 1st. Since I really don't have more then 1 open position going at once I'm not too worried about the changes. I do agree it makes it a little more difficult and have less direct control over your trades, but we'll see what happens when the time comes.

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