Foreign Exchange Dealers Coalition (FXDC)

Re: CFTC Proposed Retail Forex Regulatory Changes

To Whom It May Concern.

My letter to you addresses both your concerns as well as the concerns of the CFTC.

I have read the complete script of the CFTF proposal and find a distinct lack of positive direction within its contents.

Clearly, investor protection and integrity in the Forex Industry is of utmost concern to all of us.

The CFTC has stated the need to protect Forex investors and has complained of the numerous occasions in which fraudulent actions by unscrupulous/unregulated brokers have caused massive losses by retail traders.

We all favor a cleaner industry but as it stands the good intentions of the CFTC proposal, rather than making the Forex less hazardous, would likely cause irreparable harm.

As you are aware, the first rule of risk in the Forex market is that a trader should never trade with any more capital than he/she can afford to lose. Contrary to its objectives, the principle flaw of the CFTC 1:10 leverage proposal is that of seeking to ward off risk by blatantly disregarding the industry’s first rule of risk.

I live in Canada. I’m a Canadian by birth and as such I have little to gain or lose as a trader by the CFTC proposal. However, I also have many friend and colleague traders who are Americans. Many of them look to me for leadership regardless of their citizenship or mine.

What is the answer to the CFTC proposal? Where is the solution that will help the CFTC, Brokers/Dealers and Investors alike?

I respectfully suggest the answer may be closer than you think. In fact the answer may be right next door to you, in Canada. Please consider in your thinking that Canada has an organization called IIROC (Investment Industry Regulatory Organization of Canada). IIROC is a model which you can use to counter the CFTC proposal and stave off what could be a catastrophe in the making!

I urge you to read about IIROC and Forex regulations in Canada and/or Contact Mr. Bob Wong, Vice President of MF Global Canada at 1-800-268-9294.

Sincerely,

Jeff Langin

Forex Trader and Educator

Well, it could be but then again…Maybe they just don’t understand what they’re talking about.

On the question of leadership on all of the boards and forums I’ve visited this past weekend, I find it astounding that people who are supposed to know these things aren’t even addressing what the real issue here.

This is very important and it is vital that everyone recognize the real issue here.

As I read it, the CFTC 1:10 Forex Leverage Proposal in somewhere between misguided and outright ludicrous. It appears to me that the CFCT does not understand retail Forex market trading and where money management ‘risk’ can become hazardous to Retail Forex trading. If they do understand the Forex market then the proposal is disingenuous at best.

The stated intent of the CFTC proposal is to protect retail traders from risk.  But they are missing the mark.

What the CFTC is proposing increases the retail trader’s risk by a factor of 1000%.

The math goes this way:

At the current 1:100 leverage, for each $100.00 of his/her out of pocket Capital Investment Risk Exposure the trader is entitled to trade $10,000.00 worth of currencies.

At the proposed 1:10 leverage, the trader is entitled to trade the same $10,000.00 worth of currencies but his/her out of pocket Capital Investment Risk Exposure is $1,000.00 as opposed to $100.00.

The CRTC proposal ‘increases’ out of pocket Capital Investment Risk Exposure by 1000%.

Clearly something is wrong with the proposal; it is either terribly misguided or worse. How would the retail trader’s exposure to risk be reduced with their proposal? What is the common sense answer that is being overlooked?

Reducing Leverage from 1:100 to 1:10 is not the answer. The proposal as it stands as a disaster-in- waiting for retail traders.

The right solution is for the CFTC to tackle margin control.

In order to protect the new/naive/self destructive and or otherwise uneducated trader from him or herself, account margin limitations should be revised so that the trader’s out of pocket Capital Investment Risk Exposure is never any greater than 5% or 10% or his/her trading account at any time.

Leave leverage alone; leverage is neither the problem nor the solution.  The answer to risk exposure is not leverage control.  In fact, leverage control would have the exact opposite effect by increasing risk – tenfold.

The answer is margin control.

Apart from that, I would call on the CFTC to use whatever pro-active and aggressive steps necessary to keep unscrupulous brokers/operators and get-rich-quick- and-easy ‘fantasy’ educational scams out of business.

I urge all Retail Forex traders to write to the CFTC regarding the proposal and use this sort of tact.

You can feel free to use the body of this message as an outline for your message.  Don’t only bitch and complain; give them a solution as well. Tell the CFTC to police risk through managing margin: not through reducing leverage.

Send your comments directly to the CFTC at: secretary@cftc. gov.

Please include ‘Regulation of Retail Forex’ in the subject line of your message and the identification number RIN 3038-AC61 in the body of the message.

You can also submit your comments by any of the following methods (include above ID number):

Fax: (202) 418-5521
Mail: David Stawick, Secretary Commodity
Futures Trading Commission 1155 21st Street, N.W.,
Washington, DC 20581

Courier: Use the same as mail above.

In addition to this I suggest you C/C a copy to your area Congressman/ Congresswoman. ..to impress upon the CFTC that you are willing to take your opposition to the CFTC proposal to a higher level.

One more thing is this…don’t just do nothing because you think that in the worst case scenario you can get an account abroad…the CFTC wants to get it’s grubby little finger into Europe too so…Stop them now by telling them that the problem is not leverage!

Regards,

Jeff

Ask yourself the right questions.

What time do you prefer to trade each day? How much time can you devote to trading while maintaining your trading as an enhancement rather than detraction from your family, lifestyle, job and your normal recreation time?

In order to assess what style of trading is best for each individual, first it’s necessary to assess our individual priorities in life. In addition we have to assess what our trading goals are and work together with both parts, finding a happy medium that won’t adversely affect either your everyday life or your trading.

A good yardstick to use in order to make this analysis is to understand what amount of spare time we have to dedicate to learning the Forex. Whether that is 7 hours per week or 21 hours per week will help you to also assess the style that would more suit you and not disturb other important areas of your life.

For most people the answer to this question might be simple, but it also might not necessarily be correct:

“Yes, I want to trade the Forex and let my money work for me while I sleep and do anything else but sit in front of my computer.”

Well, in time you can get there. However, practically speaking there is much to learn before we can get to that point. It takes time, a lot of time to understand how to read the charts accurately, to comprehend where to find important Resistance and Support points and to get a feel for the all–important Market Fundamentals.

Remember that our charts for the most part are lagging indicators. While chart history can be used to analyze currency pair behavior and relative degrees of probability, it can also be used to predict the immediate future when applied together with a relative understanding of Market Fundamentals – you don’t however, need to be an economist to understand and to follow the dynamic of economics that are constantly making the Forex market evolve and in all respect, printing the charts as they move.

Gaining a reasonable understanding of market fundamentals takes time. It is not like reading charts. Comprehending Market Fundamentals is a process that must be evolved with time. It’s not just learning the fundamentals that are important; it’s gaining the edge of ‘living in the market’ and being able to anticipate market movements, in many cases, in advance of them occurring.

The more we understand about the market- the more we decrease risk, increase confidence and conquer our fear.

In order to be an effective trader we want to learn as much about three aspects of market conditions as we possibly can:

1. Reading charts
2. Understanding market fundamentals
3. Understanding our goals and the means by which we can achieve them

The above are not stated in order of magnitude. They are all equally important.

What all of this ties directly into is Risk Management- a.k.a. Risk Aversion. A novice to the the Forex will demo trade and will doubtlessly wind up with many, if not most of his/ her trades in the loss column.

The key is to thoroughly understand why each loss occurs.

As we progress along the learning curve we will find the answers. The major battle is that of time. Most of us want to learn how to get the pips now so we can start making real money. That way of thinking is
unrealistic. We must practice and we must study but we must do both of these at a time that is convenient to our family and to our work and to our regular everyday life.

The first thing we need to do is open up our monthly charts and find out what has been going on lately. This as well applies to more seasoned traders who can occasionally lose their sense of general direction.

What we want to find are the Prevailing Trends. Those are the trends that have been continuous for about the past 6 months.

Our initial aim is not necessarily to trade straight off the Longer Term charts because that takes a great deal of understanding and also relatively deep stops.

However, by grasping the overall prevailing long trend we can impress upon our mind the recent 6 or so months of relative strength and weakness of each currency and currency pair.

I always suggest to any new trader to focus on the majors first. Those are the currencies in which you will see the USD as the prime or the ‘cross’ currency and each symbol. The majors are in order of magnitude of market impact:

1. USD/JPY and EUR/USD (The Two Main Divers),
2. GBP/USD, USD/CHF, USD/CAD. (The Secondary Drivers)
3. AUD/USD, NZD/USD, and (Tertiary drivers for the Asian-Oceana region)

The reason I advocate understanding the movements of the majors first is that these are the currencies by which all other currency pairs re-act. Missing from this list is the all-important CNY/USD (Chinese Yuan/US Dollar as yet, not handled by most retail brokers).

Learn the majors first, with focus on the EUR/USD and the USD/JPY.

Understanding the impact of the USD on all other currencies is the best place to start. A good place to begin is to concentrate most of your focus on these two pairs: EUR/USD and USD/JPY.

We work through this in a step by step manner. Is the USD strong or weak? If so, how long has it been strong or weak versus which of its major pairings? If it has been week for 6 months, let’s try to understand why. If/when we understand why we may be able to predict if this weakness will continue.

If it has been strong for 6 months, how did it get that way and, are there times when it strengthens and then weakens again? If so, how often does this occur and when and why does this occur?

We can take this same procedure down to the weekly time frames. Then we can take it down to the daily time frames.

This will unable us a point of departure for understanding the Forex markets. It will also give us an idea of when we need to study and how much time we can work our study around our daily life’s schedule. If we begin with a simple approach, step-by-step we can build and enormous understanding of what the market is all about, how we ourselves can fit into it and how to most practically can work it around our busy every day lives.

The Forex market contains two distinct groups of traders. To begin with, the difference between these two groups should be carefully understood.

GROUP ONE:

Group One has a vast trading capital resources, fewer players and far more trading experience than Group Two. Group one essentially controls the game. Group One is made of mainly of Institutional players such as Banks, Commercial and Corporate Macro Accounts

GROUP TWO:

Like Group One, Group Two also has vast trading capital resources but…that is where the similarity ends.

Unlike Group One, Group two has millions of players, mostly private individuals. In addition, Group Two has by and large, far LESS experience at trading the Forex than Group One. Group Two does not trade as one cohesive unit, all in one direction, often scalping the market or trading against the directional flow created by Group One. Therefore Most of the Players in Group Two LOSE the game Most of the Time.

So, how can the players in Group Two compete?

Smaller account players can compete consistently if they are able to counter the big money players on two fronts. Small money players cannot compete in terms in shear volume of capital and so they must compete in terms of understanding how the big money players play the market.

One, execute positions with low draw downs (tight stop losses)

Two, know how to use the technical and fundamental analysis used by the big money players in such a way as to get into positions where the lowest amount of intra day volatility occurs, thus getting a jump on the market at and getting to ‘zero loss- zero risk’ positions using the momentum generated by the infusion of big player institutional capital.

These are of course all words. Actions are what matters.

The art of executing positions with tight stop loss, low draw downs and quick ‘no loss – no risk’ positioning is not something that can be taught in a short time frame. It requires many hours of learning and many more hours of practice.

As a Forex trader, one needs to understand what bargain basement hunting means but once fully understood it becomes the crux of proficient trading. There is a term I use for this that I call, being ‘At the Moment’.

There’s a beginning and an ending to everything; the ending of the movement of majority capital flow in one direction is always the beginning of the movement of majority capital flow in the opposite direction.

Every large movement in the market hinges on a moment of transition. Understanding how and where to find the moment of transition is the very heart of what I‘ve studied for years.

Let’s look at this quite logically and ask one critical question:

If a trader executes a position with a drawdown (stop loss) of 75, 100 or 150 pips, does the trader really understand which way the majority of capital flow is moving or, is the trading guessing? If the trader is guessing, what does that say about the experience of the trader? What does it say about how much risk the trader is willing to take by ‘betting’ on which way the majority of capital flow will move? High school mathematics would readily tell us that, if the trader is guessing, the trader will lose his or her drawdown about 50% on the time. If the trader requires a stop loss of 75, 100 or 150 pips there is obviously some doubt about what portion of the stop loss will be required in order to give the trade a chance of succeeding. Logic would suggest that the trader is guessing.

Unless you have millions of dollars and can withstand high ranges of intra-day volatility, successfully trading the Forex market comes down to few basic principles;

• Understanding when and how to execute a trade in the proper direction WITH a minimal stop loss of the broker spread plus about 20 pips, a total of about 25 pips on average. I use about 15 to 20 pips under most circumstances when trading majors, slightly more when trading exotics.

• Understanding how to manage your trading account so that you’re getting the maximum benefit from the broker margin while retaining the least exposure to your own money.

• Knowing when and how to circumvent the multitude of risks that are prevalent in the market within the time interval in which you are trading. What this comes down to is understanding ‘what the majority of other astute traders are doing’ so that you’re not doing the opposite.

It’s these ‘How To-s’ that most traders don’t get a chance to learn that causes them to consistently watch their trading accounts evaporate, time after time.
In summation regular, every day Forex traders need to understand precision trade execution techniques in order to compete with the large money players.
Not understanding them is where high risk and large draw downs undermines any chance of being able to compete. This is the reason why most traders who are new to the Forex market get ‘knocked out’, lose their accounts, lose their confidence and ultimately give up trading altogether.

Both you and I and all of our esteemed colleagues across the globe as participant traders are the people who change market consensus and translate Market Consensus into price movement. We are all very much like the judge and the jury in the virtual court room of Market Consensus. What we are seeking is the cold hard evidence that helps us formulate a collective opinion of sentiment towards the outcome of the trial we are all presiding over.

What’s on trial is the value of each individual of our Major eight currencies based on the fluctuations of inflation for each respective countries economy. Market sentiment translates into daily price movements which constantly moves towards a final determination of a currencies true market value based on the current fundamental criteria.

Our virtual court however is different than that of a court of law in the respect the trial in our court is never over and a final verdict is never actually reached. Sentiment keeps evolving as the evidence keeps changing over weeks, months and years.

The evidence we are dealing with in the court of market sentiment is derived for the most part from the data that we find on our weekly Economic Calendars. It’s also derived from another extremely important factor that is not on our Economic Calendars – Fear and Pessimism.

Let’s talk about the Calendar first.

This is business as usual in the Forex market. One by one as data is released, evidence is revealed and sentiment is translated over to price movement which is reflected on our charts. This business-as- usual operating sequence is what that I refer in my teachings as the ‘Underlying Fundamentals’ of the market.

The underlying fundamentals are by and large, what drives much of the time. They will always exist and be present in the market no matter what else occurs off of our calendars. The underlying fundamentals are in every sense the entire foundation and super structure of the Spot Forex Market.

From time to time we have another type of fundamental that comes into play.

These are fundamentals that are not scheduled on our Weekly Calendars. In fact, these are fundamentals that seem to come out of nowhere and blindside the market, often pushing the underlying fundamentals into the back seat and taking over the wheel as the temporary driver of market sentiment. These are what I call in my teachings the Over-Riding Fundamentals. This is the part of the Forex market where Fear and Pessimism comes into play.

These are the market drivers that we as traders need to be aware can take hold of the market for extended periods and reverse the underlying fundamentals completely towards the opposite direction in which price was previously moving. Count on this occurring in the market in a larger and more protracted sense once every few years. Count on this occurring in the market in a smaller and less protracted sense about once ever month or two.