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
For those who have a foreign exchange (forex) trading account in Singapore, you may have been notified by your trading broker that with effect from 8 October 2019 onwards, the Monetary Authority of Singapore (MAS) will introduce a regulation that would require Forex traders in Singapore to maintain a minimum of 5% margin for all forex trade, up from a previous 2%.
Who Is It For?
This 5% margin requirement applies to non-accredited, non-institutional and non-expert investors. On the other hand, accredited investors, institutional investors and expert investors can continue to make their forex trades while maintaining a 2% margin.
What this essentially means is that forex traders in Singapore (i.e. regular retail traders) will now need to maintain a significantly higher safety margin when making their trades.
Since forex trading typically requires the use of leverage, the increase in margin required would mean that traders will no longer be able to leverage as much as they used to, thus potentially reducing the returns that they are trying to achieve.
For example, in the past, brokerages were able to provide its traders with up to a 50:1 leverage (i.e. 2% margin). This means that a $2,000 capital would allow traders to take up a currency position of up to $100,000 – as long as the margin (2%) is able to be maintained.
Moving forward, this will no longer be possible. Instead, an initial $2,000 capital would now allow traders to only take up a position of up to $40,000 (5% margin).
If You Are An Existing Trader, How Would This Affect You?
One of the biggest ways the new regulation may impact existing traders is that it reduces the size of the position that they are able to take, for any level of capital they have.
This not only means that potential returns are going to be lower, since the level of leverage you can use is now lower, but you will also need to fork out a higher initial capital if you would like to maintain the same position size for your trade.
For example, to maintain a trading position of $100,000 across all your forex trades, you will now need a minimum of $5,000 in capital, as compared to $2,000 previously. If you have a bullish view of the market, you might need to consider taking a larger margin as you are no longer able to leverage as much to generate the returns you want.
Risk Management Is Still Essential
In order to be a successful trader, you need to be able to manage risk well.
Think of risk management as wearing a seat belt in the car. You wear it while driving not because you think the car will crash, but just in case it does. By wearing your seat belt, you are reducing the potential risk of getting an injury that could happen while driving.
Being a high-risk, high-return activity, trading also requires traders to adopt a strong risk management process. The increase in the margin required for forex trade is one such risk management technique that traders will need to comply with.
Of course, there are also other risk management techniques that you can adopt, such as never risking more than 1% of your capital on any one trade or putting a stop-loss, guaranteed stop or trailing stop on your trades.
To sum it up, the increase in margin that forex traders are able to take will mean a lower leverage and hence, lower overall risks in trades. A higher margin also means that the return on investment for traders will be lower. On the flipside, this also means a higher margin of safety and also lower cost of financing, since the amount borrowed to fund trades will be lower than it used to be.
If you want to learn more about forex trading, it’s highly recommended that you get yourself educated first on how trading works, the risks that you are exposed to when trading, and also to learn for yourself some possible strategies that you can deploy for the trades that you make.
You can do so by going through the wealth of information readily available on the internet (take everything that you read with a pinch of salt though). Beyond that, trading platforms such as IG also offers different programs where you can participate in seminars and webinars, read up about trading strategies and even get started by using a demo account first which would allow you to get familiar with the platform and your trading strategy before you deploy actual money for your trades.