Pros and cons of no trading benefits in EU
Bonuses and leverage have become a major incentive dangled by Forex brokers to invite potential traders. Since the Forex market is decentralized, every broker could set their own trading conditions, but this is about to change.
Forex brokers operating within the EU were governed by a list of rules under the MiFID body of regulations. The first version came into effect in 2007, but it had no say about some of the benefits we now see being offered. However, starting on the 3rd of January 2018, which is basically the first day of trading, most of these benefits will not be available.
The revised MiFID regulations have capped the amount of leverage at 50:1 and completely banned any types of bonuses. At a time when 100% bonuses had become common and leverage going up to 1000:1, FX trading has started to remind online casino bonuses and promotions. However, now these regulations are bound to shake up the Forex industry. It is very important to see how the regulations affect the traders:
How would traders benefit from the new rules?
Even though many brokers don’t offer bonuses, all of them have high leverage of at least 100:1. The cap on leverage is going to be the biggest change to the industry. This cap was introduced because financial regulators believed people were losing money in the Forex market because they used very high leverage without proper understanding.
Leverage is a double-edged sword, with the potential to magnify both risks and losses. For an inexperienced trader, high leverage was the tool with which they hanged themselves. Instead of urging traders to take lesser leverage, which most people would ignore anyway, regulators simply chose to take the choice away.
Leverage of 50:1 is still high, all things considered, but it protects the traders from sudden, excessive losses. Besides, you can still gain higher leverage after doing a test to prove you understand the risk. Thus, only those who can handle it will have access to it.
As for bonuses, they would allow traders to choose brokers based on their actual offerings rather than a lucrative bonus. Bonuses were noted as a guise used by fraudulent brokers to lure clients with attractive offers. Without them, potential clients would have to choose brokers based on what really matters i.e. spreads, regulation, service quality, etc.
What is the downside to a lack of benefits?
While some brokers used bonuses and other benefits for devious purposes, others had good intentions. These bonuses can be really helpful to a trader learning about the Forex markets, and taking them away eliminates a very good resource.
The worst part is that the MiFID II regulations might restrict individuals with lesser capital. Leverage, for example, is what enabled traders to participate even with $100, but without it, such a trader will have more difficulty. Bonuses also helped to boost smaller accounts by increasing equity which would allow the trader to control a higher value of assets.
There are probably more reasons traders will be happy or unhappy with the new regulations, but these are the ones that will affect them directly. Other rules within MiFID II affect the brokers, but the traders too will feel the ripple effect.