Why brokers lower their leverage

More and more often we encounter a situation in which our broker informs us about a periodic increase in the required margin (= leverage, financial leverage) on selected instruments or on the entire account. How did you come to that? Is it meant to make life difficult for a trader, and so difficult? Yes and no.

When did it start…

Some brokers have been lowering their leverage periodically for a very long time. However, the mass phenomenon of "blowing in the cold" began about 2 years ago, that is, a moment after everyone "woke up" after the memorable 15 January (freeing the franc exchange rate by SNB). It was at this point that not only traders experienced the shock, but also brokers. This made them aware of how many threats can come from not adjusting the leverage to the prevailing market conditions. Both for them and for their clients.

This also opened the eyes of the regulators, with consequences in the form we are observing the limitation of the leverage to this day (incl KNF decision to limit the leverage to 1: 100).

Lever down ...

I am of the opinion that leverage is not risky in itself. It's a sea of ​​possibilities. It's just that when we don't know how to swim and we enter deep water, drowning is almost certain. So it is easy to come to the conclusion that only the trader is risky for himself by making irrational decisions and using certain tools unskillfully. But the broker is also not without fault. By providing high leverage to people who are not necessarily ready for it, it kind of causes trouble for itself - and this is what several brokers found out by staying with their clients' large overdrafts after Black Thursday.

READ NECESSARY: How not to lose more than you paid - Black Thursday scars

… Safety up

By giving the opportunity to open a large position with high leverage in a market with increased volatility (or one where it may occur as a result of an event X), the risk of an overdraft increases drastically. And this is a problem for both the trader and the broker (especially the foreign one, who may find it difficult to recover their debt). Screwing in the screw, i.e. cutting off the trader from the possibility of exposing himself to a large exposure, can save both parties.

With the lever 1: 100 and deposit 10 000 PLN the maximum position that we can open on EUR / USD is approx. 2.30 lota. With such a volume, the sudden trash of the 150 pips leaves us with a debt of over PLN 1000.

Of course, continuous, irregular changes in the amount of collateral required can be embarrassing and knock us out of our plan (especially long-term). It is also a problem for people using news trading, where usually a larger lever is recommended to optimize profits.

A solution known for a long time

Some brokers have long used limiting leverage on selected instruments of higher risk. An example is Dukascopy, which regularly lowered the leverage for the Russian ruble and the Turkish Lira in times of uncertainty. He is also one of the few brokers who reduced the leverage on the franc Przed release of the course by SNB. However, life has shown that this is the right concept that most brokers are currently repeating.

We are dealing with a situation where every louder macroeconomic event (most often elections) is associated with a reduction of leverage. And to be honest, we should get used to it.

How much can you limit the siphon

Theoretically and practically - to zero. Or rather, one to one. It's just that brokers practically do not decide on such drastic solutions. Most often, the reduction of the leverage from 1: 100 ends at the values ​​1:50, 1:30, 1:10, in extreme cases 1: 5.

The scale of reduction is determined individually by each broker based on an analysis of threats and risks in combination with the broker's security capabilities. That's why you should always check what leverage is at our broker's.

How we will find out about the reduction of leverage

There is no worldwide standardization in informing customers, so depending on the broker, the way in which this important information is transmitted may vary. Usually, the methods of communication between the broker and the client are presented in the regulations.

The most common way is to send a message by email a few days before the fact. It's just that in modern times emailboxes can be sensitive enough that they can put this very important message into spam. If we do not have the reflex to check this tab regularly, then it is very likely that we will overlook it.

Another way is sending SMSs. It's just that this method is extremely rarely used by brokers - which is a pity, because it is extremely effective.

READ ALSO: SMS notifications about the publication of macro data

Sometimes information is hard to find

Information published on the broker's website. Yes, we can definitely find this type of information there. But there are two small problems. First of all, not everyone follows the macro events with interest (although it is worth doing it for the sake of peace) so they may not know when they should visit this page. Secondly, the design of some broker's websites does not provide for the publication of such information or is very often hidden in some tab, where hardly anyone looks at it regularly (eg Offer -> Trade -> Instruments -> News -> Information about changes in margins 🙂). Therefore, the effectiveness of providing information in this way is extremely low.

Pop-ups on the platform are a common solution. There are two problems here. Unfortunately, in the world of advertisements attacking us from every side, we have reflexes, where, when a pop-up window appears, the first thing we do is look for X to get rid of it as soon as possible. However, it is worth waiting for these several seconds with trading and read what the broker has to tell us. And the second problem - not all platforms allow the transfer of information to the trader in this way - and there is no solution for this.

Even if the broker uses all the possibilities, believe me, there are cases of people who will find out "after the fact" or even worse - "in the process".

Good advice - turn on your thinking

Below are some tips that may someday save you from being uninformed.

1. Follow, even briefly, events in the global financial markets or at least those with whom the instruments you trade are associated with.
2. Monitor the broker's website and pop-up messages on the platform.
3. Regularly check the SPAM tab in the mail.
4. After opening a position, check what margin has been charged by the broker.
5. Primarily think and rationally use the benefits of financial leverage. Trading with the use of full, large leverage on an instrument with a higher risk you have to count on possible consequences and the possibility of limiting the leverage by the broker at critical moments.