Most traders starting their forex trading are afraid to lose the money of the broker and remain owed to it. As practice shows, it is very difficult to do, but it is possible, it can happen for a number of reasons, and in this article, we will talk about it and its protection.
What is a negative balance?
A negative balance on forex is when a negative amount appears on account of your trader’s account, most likely, a zero value will be present in the trading terminal.
This phenomenon most often occurs due to the mistakes of the trader and ignoring the methods of risk insurance when trading forex.
First, you need to find out why a negative amount appears on the trader’s balance because for this to happen, there are two stops on the broker’s side, with which he protects his money. And if a margin call is triggered only at the initiative of the broker, then stop out is set to automatically terminate the transaction as soon as the price reaches a critical mark.
Usually the stop out level is around 10-20 per cent, that is, logically in any case, about 10% of the deposit amount should remain on the trader’s account.
But due to the fact that there is such a thing as gap forex, a price jump is possible, as a result of which stops will not work, both from the side of the trader and the side of the broker and the transaction will close with a negative result. FX brokers with negative balance protection play an important role for a client, and it should be said that not a lot of brokers offer this opportunity to clients.
This happens especially often if the transaction is postponed through weekends or holidays, the size of the price gap for several days can be 100 or more points. And if the transaction has weak collateral, this will lead to a negative deposit of the trader.
For example, you have a deposit of 100 US dollars on deposit, using large leverage, you open a deal for the purchase of the currency pair Euro/dollar in the amount of 0.1 lot. This event takes place on Friday evening, and for some reason, the transaction remains open for the weekend.
On Saturday, negative news on the euro comes out and already on Monday, Forex trading opens with a price gap of 120 points, and down. As a result, you lost more than $120 with the swap commission. That is, your deposit has become – 20 US dollars.
What does this mean to protect against negative balance?
This means that if the broker cannot close the position in time so that the client does not lose more than his account, the broker covers your losses and gives you a guarantee that you will not have to pay extra money to pay your fees. A broker without such protection will also do everything to prevent you from falling into a negative balance, but if it fails, you have to pay an extra expense.
Therefore, if you invest in a broker without protection from debits, and the price gradually depletes your account, there is practically no chance of getting into a negative balance because the broker will calmly cope with closing the position at Stop Out.
The situation in which you take your position over the weekend can be problematic, and on Monday, the market will open with a price gap that is at your disadvantage. Then the broker will not have a chance to close the position so that you do not fall into a negative balance, and you just need to pay extra money.
In general, when you are looking for a decent forex broker, make sure to pay close attention to the ones with negative balance protection. Not only it is good for a trader, but it is beneficial for a broker to offer such a perfect initiative.