This article was written in partnership with IG, the world’s No.1 CFD provider (by revenue excluding FX, February 2018). All views expressed in the article are the independent opinion of DollarsAndSense.sg
By now, most Forex traders in Singapore would know that the Monetary Authority of Singapore (MAS) will increase margin requirement for Foreign Exchange (Forex) trading from 2% to 5% form 8 October 2019 onwards (Accredited investors, institutional investors and expert investors can continue trading at 2% margin requirement).
Margin requirement refers to the percentage value of a trade that traders have to fund with their own cash. A higher margin requirement means being able to leverage less on the borrowed funds of the broker and having to put up higher capital up front to fund a trade.
To understand how the increase in forex margin requirement could potentially affect both regular and new traders, we spoke to Collin Seow, a veteran in the trading industry.
Besides being the founder of a trend trading system – The Systematic TraderGPS, Collin also runs TradingPLC, a co-working space for traders in Singapore. Collin is also a qualified Chartered Portfolio Manager (CPM) holding a Certified Financial Technician (CFTe) qualification and is a member of MENSA Singapore.
DollarsAndSense (DNS): Collin, thanks for your time. As someone who teaches trading and trades for a living, this increase in margin for Forex is obviously significant. What are your thoughts about this change?
Collin Seow (CS): The increase in margin will weed out some speculators and gamblers who have little or no trading knowledge, but who are looking to trade to make quick money.
Statistically, many people who trade on low margin (i.e. high leverage) tend to lose money, not necessarily because their strategy is bad, but because they are trading with the incorrect mindset in the first place. They want to make quick profits with low initial capital – thus the use of high leverage.
Because of this false hope, many of them inevitably lose money instead. The increase in margin will guard new traders against this. It will also reduce the amount of speculation in the Forex market among new traders who are hoping to earn quick bucks with little capital.
DNS: Which groups of traders do you think will be impacted most by the change?
CS: The group of traders that I think will be most adversely impacted are the regular traders who are profitable, and trading between the 2% to 5% margin currently.
For example, even though the minimum margin requirement previously was 2%, many experienced traders were typically already trading above the margin (e.g. 3%, 4% or 5%).
So now, even though they may be responsible, experienced traders who are profitable and not trading at the minimum margin requirement previously, they will still need to put up more capital in order to maintain similar trading sizes, thus reducing their return on equity.
Personally, I don’t think trading 3% to 5% margin is excessive. We have to remember that in the Forex market, actual movement between currencies are quite low, in spite of what many non-traders sometimes perceive it to be (e.g. dangerous, risky). It’s only when leverage is utilised that the exposure becomes bigger.
Forex brokers in Singapore are going to be impacted as well because total trading volume may also decrease.
DNS: Are there any groups of traders who may benefit from the increase in Forex margin required?
CS: New traders are going to benefit from this increase in margin because it will protect them from being drawn in by the promise of low capital requirements to make high returns. Now that they need to put up more money) in order to get started, they will think twice about whether they can make a lot of money with the capital they need to put in, as opposed to just investing it without careful planning.
DNS: Given the increase in margin for Forex, do you think people may be drawn to trading other asset classes instead such as indices?
CS: That’s possible. Previously, traders could use a margin of 2% for Forex trading, allowing them to take up a position of up to 50 times their capital. This was reasonable in my view because actual movement in the Forex market is actually very small, hence the need to utilise leverage in order to increase the size of the position.
Now that margin for Forex trading has increased to 5%, this will put it at the same level with an asset class such as indices, in which you also need a margin of 5% per contract. However, indexes are a lot more volatile and it’s not uncommon to see a movement of 2-3%. Hence, it’s possible that traders may now find indices as a more attractive product to trade simply because the absolute return that you can potentially get (if you take the right position) is higher.
Increase In Forex Margin To Help New Traders
We believe that the increase in Forex margin requirement will prevent the people who are new to trading from being easily drawn in to Forex trading because of the lure of high returns with low initial upfront capital required. In order to obtain a similar position size compared to the past, you now need more capital. This will also reduce the return on equity that traders are able to achieve.
|Position Size||Profits||Capital Required||ROE|
If you are an accredited investor, the latest change does not affect you. Those who qualify as an accredited investor can choose to be an IG Accredited Investor to continue using the Forex margin of 2%. They also enjoy preferred rates and rebates on certain markets.
If you are not an accredited investor, then the new Forex margin will apply to you. This should not be viewed of as a bad thing, especially if you are a new trader, since the higher margin required will provide you with a greater margin of safety, ensuring that you do not take on a larger position which is higher than what you can afford.
Remember, the greater the leverage, it may mean that your losses are going to be higher.
Learning how to manage your risk and getting your trading strategies right is one of the key traits of a successful forex trader. It’s okay to try out different strategies (while keeping your losses small) so that you can continuously improve your own strategies, and focus on your trading mindset, strategies and risk management techniques.
Alternatively, you can also start off with a demo account first. IG offers demo account with $200,000 in virtual funds that allows you to get familiar with Forex trading before you even think about opening a funded account. Once you are comfortable with this, you can then move on to open a live account.