Hi,
Could you please tell me what they mean when they say one can lose more than the deposit in Forex ? Does it mean that the loss can be equal to the total capital invested (traded) which is equal to => deposit + the leverage used? Or can it be more than total invested amount ? If so, how is that possible ?
Thank you
Simon
Hi.
You shouldn’t really be able to…
it happens on some platforms when the market moves too fast due to slippage… when you hit the margin call, the system doesn’t close in time…
Ask your broker if that can happen on their platform and if they will take the loss if it does… Respectable brokers give you a balance adjustment back to 0 when this happens.
Yes - unless you use a broker who offers [U]guaranteed[/U] stop-losses (i.e. they’ll guarantee to settle your trade at your specified stop-loss level regardless of whether they were actually able to close it at that price, thus transferring the outcome-risk of fast-moving markets from you to them, an “insurance facility” for which they charge extra on all spreads), then you can at least in theory be left owing them more than was in your account. It’s very extreme and very rare, and whether they’d actually sue you for it is a different question (which might depend on the amount?).
This can happen because occasionally, in very fast-moving markets, trades can’t be closed at their specified stop-losses, and unless a broker expressly guarantees to settle your trades in accordance with your specified stop-loss level, stop-losses are “never 100% certain”.
The fact that this [I]can[/I] happen at all, however rare it is, is the reason for all this “statutory wording” you see on brokers’ sites, mentioning that you can lose more funds than you have in your account.
Suppose the amount that is lost is more than the deposit in the account, how much more can it be ? Can it be even more than the amount traded ?
And are there brokers who actually settle trades at the specified SL - under normal trading scenarios (unlike for example the CHF price change that happened on Jan 15)
Yes - it can, at least in theory. (As observed above, whether the broker would actually go so far as suing you to recover whatever’s owing is a different question.)
Slight slippage is close-to-universal, but most of them get very close, for the most part.
There are brokers who will cover you even for black swans like that, as mentioned above, in the form of “guaranteed stop-losses”, meaning that you pay extra on the spread in exchange for transferring those risks from yourself to them, and under those circumstances they undertake to settle alll trades in your account at your specified stop-loss [I]whether they were themselves able to close trades at that price or not[/I]. It’s effectively “buying insurance” against these disasters, and paying a fraction of the premium every time you trade. Whether it’s worth paying for, overall, is something we each decide for ourselves (I don’t do it, myself).
In extreme examples it could be significantly more - it would all depend on how much you’d risked in the first place and then how far price went against you in this extreme scenario. However when trading normal pairs and keeping your risk low (i.e. 1% - 2%) then when operating under normal trading scenarios and even highly unusual scenarios losing more than your initial deposit just won’t happen. It’s legalese that brokers need to include.
Can’t speak for other brokers but I’ve used Oanda for few years and they’ve always been fine with stops. You tend to get a tiny bit of slippage when it comes to stops / target profit closes so when it comes to break even stops I usually enter a fraction above my true break even point. I haven’t had any issues with market conditions not causing my stops / TPs to work but I only ever trade in major pairs such as EUR/USD & GBP/USD which have high levels of liquidity. I don’t trade significantly manipulated currencies such as CHF, HKD, etc. as you’re always risking that the level of manipulation changes all of sudden and you’re on the wrong side of it.
It means you can end up owing your broker money, something that happened when SNB removed the cap on EURCHF. There were people with 10k accounts ending up in -100k (basically owing the broker). Some of those negative balances were cleared out, some were pursued on court.
You better chose a broker that guarantees negative balance and make sure you don’t overleverage your positions because it happened in the past it [I]will[/I] happen again.
True bro, you should choose a broker that is the case. So that you will only lose a deposit when stop out, or do not owe.
In a nutshell read about SNB black swan event it should clear up a lot for you.
But if to dig into details it means that sometimes abrupt market movement may leave your broker unable to close your losing position (issue Stop Out) because there is no available price. So you lose all you deposit and start to drive your broker to losses too.
For example you sell 5 lots of EUR/USD at 1.0700. Your balance is 2000$ and leverage 1:500. Margin requirement for that position is 500 000$/500=1000$. Every pip costs 105=50$ for you. Market suddenly surged by 50 pips movement against you (imagine there is a gap when price suddenly changes from 1.0700 to 1.0750.). It means 5050=2500$ loss but you just have 2000$ in your account. You lose all and your brokers additionally loses 500$ and you fall into negative 500$ balance. Some brokers like hotforex refunded negative balances for clients after SNB event.
Hope its clear enough to understand.
Simon, in view of one or two of the replies above, I thought I’d post again, just to clarify that “negative balance protection” and “guaranteed stop-losses” are of course two different things! 
Hi Guys,
Thank you for the replies.
profitbaby:
It means 50*50=2500$ loss but you just have 2000$ in your account. You lose all and your brokers additionally loses 500$ and you fall into negative 500$ balance.
Could you tell what the maximum negative balance one can get?
Simon, in view of one or two of the replies above, I thought I’d post again, just to clarify that “negative balance protection” and “guaranteed stop-losses” are of course two different things!
Lexys, Thank you for highlighting this !
In general, they caution people about leverage. Is negative balance the only reason or is there any other reason ?
And if so, suppose we use high leverage but only take a small position, it would be ok right ? especially because it would help in reducing a margin call from occuring?
Thank you
Simon
I am interested in knowing the different because a guaranteed stop loss looks same to negative balance protection to me.
My learned friend, there is a very big difference between stop loss and negative ballance protection. For stop loss, you are to set it to the amount of pips or percentage you are willing to risk per trade, and if you lose that specific amount you’ve risked most time you dont regret it, bcos you ar the one who set it. For negative ballance protection, you dont set it, it’s just there to protect your account from going to $3000 to $0.0000. Mind you, it’s not every broker that has that negative ball. protection, for my broker and the platform am using, once your account runs down to 30% you will have margin call by email or how ever you set it. I hope that helps, G’luck with your trading.