Following the Black Swan event in 2015, some brokers did try to claim full losses from their clients.
I’m not sure how many, if any at all, succeeded with their claim, but you’ve done the right think asking beforehand.
May be worth making future enquiries by Chat or email, so you can keep a written record, but I wouldn’t think any decent broker would try to claim now
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Thank you for your response, very helpful.
Hi @mitsufisher,
Yes, if you trade on leverage, then the face value of your trading position is more than the money you have in your trading account. Therefore, if the market moves against your trade enough, it could take your account balance negative.
For example, suppose you open a position to trade one standard lot of USD/JPY. That’s 100,000 units (100K) of base currency which in this case means 100,000 US dollars.
If you have $25,000 in your account, then your effective leverage would be 4:1, since your trade has a face value four times greater than your account balance. With this leverage, it would take a 25% move against your trade to take your account balance to zero. Therefore, a move of more than 25% (about 2,500 pips) against your trade could leave you with a negative account balance.
If you have $10,000 in your account, then your effective leverage would be 10:1, so a move of more than 10% (about 1,000 pips) against your trade could take your account balance negative.
At the time of this post, the US regulators, have set the minimum margin requirement for USD/JPY trades at 4% which allows you up to 25:1 leverage. That means you would need at least $4,000 in your account to open a 100K USD/JPY position. Trading with this maximum leverage would mean a move of more than 4% (about 400 pips) against your trade would leave you with a negative account balance.
It’s important to note that under normal market conditions, most brokers including FOREX.com have monitoring systems in place that will automatically close your trade once your account falls below the minimum margin requirement. This is to reduce the chances that your account balance goes negative.
That said, you do risk incurring losses greater than your account balance, especially during periods of extreme market volatility. While it is not FOREX.com’s policy to hold clients responsible for modest negative balances, we do reserve the right to hold clients responsible for large debit balances and when special circumstances apply.
There are cases where the market price gaps or jumps from one price to a drastically different price in a short space of time sometimes even from one tick to the next. This can happen over the weekend with a gap between Friday’s closing price and Sunday’s opening price.
It can also happen with a surprise economic announcement, such as occurred on January 15, 2015 when the Swiss National Bank said they would no longer support the 1.2000[0] floor on the EUR/CHF exchange rate which had been in place for years. You can read more about what happened then in this post: LOW leverage is in fact dangerous
It’s worth noting that after the SNB event, some brokers including FOREX.com forgave negative balances, while some other brokers did not. That said, no broker in the US can guarantee that you will not be held responsible for a negative balance on your account resulting from trading losses. Therefore, it is important for you to use leverage responsibly, just as you should seek out brokers who demonstrate that they offer leverage responsibly.
FOREX.com and our parent company GAIN Capital believe that how we raised margin requirements ahead of the SNB announcement demonstrates our responsible approach to leverage. We pride ourselves in taking a long term view in the best interests of our customers, our employees, our business partners and our shareholders. It was by no means a popular choice at the time when we raised margin requirements on Swiss Franc pairs, but we think history has proven it to have been a wise choice for all our stakeholders.
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Hi Forex.com,
Wow, thank you for the detailed and complete response, very helpful.
I’d like to ask a follow-up if I may.
In your first sentence you say, “if you trade on leverage”.
I was not aware that I had a choice.
I thought brokers required you to trade on leverage.
My assumption was that having traders trade on leverage earns money for
brokers.
Is it possible to trade without leverage?
Is is advisable to trade without leverage?
Thanks in advance.
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Yes @mitsufisher, the examples in our previous post illustrate how you can customize your effective leverage.
To trade without leverage is equivalent to trading with an effective leverage of 1:1.
Therefore, to trade one standard lot (100,000 currency units or 100K) of USD/JPY without leverage would require you to have an account balance of $100,000.
To trade one mini lot (10,000 units or 10K) of USD/JPY without leverage would require you to have a balance of $10,000. To trade one micro lot (1,000 units or 1K) of USD/JPY without leverage would require you to have $1000 in your account.
Since everyone’s financial situation and risk appetite is different, only you can make this determination in your own best interest. You mentioned in another post how you are practicing on a demo account, and that’s good. Demo account practice will help you develop an understanding of how your account balance can fluctuate based on different levels of leverage before you risk real money.
You may find this earlier discussion on leverage helpful: Volatility of Bitcoin vs. EUR/USD
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I also recalled SNB in 2015 when many negative balances occurred and lot of forex brokers had to cover those loss, those went bankruptcy if they couldn’t cover. Hotforex also put an notification email for covering negative balance.
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In my experience, most regulated brokers have a negative balance protection available.
Meaning that even if your positions turn negative and are automatically closed by the broker, thus leaving your account at a negative. They are obliged to cover your negative balance. So if your balance is -500$ (for example) the broker will cover these 500$ out of his own pocket, and you will be left with a 0 (zero) balance account.
This is one of the reasons that the reputable brokers will not allow high leverage to their new clients, and will typically start with a lower one (20-30-50-100). Instead of throwing you in the deep (x200, x300, x500) right off the bat.
They will first require you to have a certain amount of trades and funds in rotation before you can apply for a leverage increase.
This however will change in a month or so.
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do you trade with several brokers at the same time ?
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It’s normal practice i guess. Trading with 2 or more brokers can diversificate your risks. And also don’t forget about condition differences. I trade with aMarkets and Instaforex, and i till now everything ok. Nice and easy 
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no way to deny your message , but it causes a great trouble for the beginners level.
I tell only about my practice. It is not the truth which everyone must blindly follow
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its okay. i just sharing my experience , nothing without it. Thank you
Hi all, nobody here talking about margin call?
I think that would prevent the negative balance.(excluding the extra ordinary event like SNB event).
I think when our balance less then 50% or 30% of margin requirement, all open position will be closed.
Or is it not applicable anymore?
Hi @Jokondo20,
We mentioned margin calls in our previous post.
However, the focus of this discussion is the circumstances that can lead to a negative account balance.
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Yes, you are! I must have jump over that paragraph.
Thank a lot.
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Thanks for providing very useful information.
Point taken. But that being the case, it is perhaps appropriate to point out that if you’re using good risk management practices, you should never find yourself in a position where you could lose your entire account in one trade. OP, if you haven’t already, you may want to go through the sections in the babypips school that cover this topic. One thing that clicked with me was determining how much you are willing to lose on a trade FIRST, then choosing where to place your stop loss, THEN calculating an appropriate position size that will keep you within those predetermined bounds. Maybe wiser, more experienced traders out there have a different way of doing it, but for a new guy like me it helps me to keep my trading sane.
The question there you have to ask; is are you there to trade to try and earn incremental profits but with consistency and gradually grow your account or are you there to gamble. Most traders especially the newbies say they are there to trade but essentially end up doing the opposite & they don’t even realize it; and that is evident on their account and the equity grows the other direction lol, if you know what I mean.
Use the broker leverage to be able to trade on the Fx market with a small deposit but trade in accordance with the balance of your account, your actual deposit amount.
Under capitalization is a factor especially with newbies; depositing more and risking less is a better way to go. Is so much easier to trade the bigger the account and the smaller the risk and no pressure and your psychology is at a better state shall i say, as you are more relaxed.
If you deposit say 5K as an example and risk say 0.1% (as an example) per trade it would take you 50 losses in a row to be even 5% down in your account and your account would still be alive and kicking lol
It’s impossible to take 50 losses in a row; the market moves in only 2 directions up or down; even if it’s ranging on the smaller time frames it’s still moving up or down.
If you can generate 10% on any account size risking 0.1% or 0.2% per trade with consistency, then buddy that’s all you need; you have the tools to make it to a $1,000,000 trading account.
Of course any crazy ass trader could generate 10% by risking 1% or 2% and letting it run on a swing trade - Wow Hang on soldier - this is not the point; The point is risk management and consistency over and over again, by risking only 0.1% or 0.2% per trade of your account balance. - This is the path to a million dollar trading account over time.
And from your question you dont have to worry about going into a negative balance unless you are risking ridiculous amounts and not using your stops, coupled with black swan events as what happened to the CHF years back, then the probability of that happening increases.
But of course you should already have your own methodology and know all the abc’s and other essentials etc. which am sure you already know since you are a member of baby pips.
Well hope this info helps.
May the pips be with you bud. : ))
Tell that WTI traders who got negative balance on their accounts because they could never thought that price can break 0 bound. There are rare market events which market models tend to neglect but nevertheless they sometimes happen and create turmoil.
I am
New to trading and I was sold a great idea about trading and how I could benefit from just a small investment and within a week of investment I realized most of what I was told or promised was a spiel… just a tactic to sell their services…
Then I was assigned an account manager who kept persuading me to invest more and not offering me much support really except for opening positions that keep making me eat up on my deposits…
So far I’ve not seen any gains and lost almost all of what I have invested… I kept giving the account manager benefit of the doubt but honestly I have lost faith in the broker after repeated wrong moves advised by them… I have not opened any positions on my own and the biggest blows were the last 2 weeks when I lost all of what I had invested advised by the broker’s account manager.
The funny part is that I was being told, make a deposit and I will help you withdraw soon but obviously if you open wrong positions and trading uninformed you won’t make but I will list a few that seem to be nagging me:
-
I have 3 open positions right now and all in -profit / I am obviously concerned that by Monday the prices may dip further and all these positions (one of them is -$900) would close by themselves…as that’s what happened with Brent the last 2 weeks…
When I saw Brent going down I had tested by opening Brent in sell position but the broker called me and asked me to close the position. -
My balance is -$125 and my fear is that just like the last several times, I will deposit another $250 and not be able to withdraw anything since my balance is in negative …. I am unsure as to what would be best thing to do… my logic says that I should have some more funds on my account but my fear is that I will get nothing back because the account manager only led me to make poor choices and I had no clue at that time/.
I am still clueless but I don’t want to give up until I’ve recovered what I’ve lost and possibly make some profit.
- Is it possible to switch over to a Different broker that I can trust with the amount I have on my account? Like the banks offer options of buying over loans etc…
Please give me some directions/clarity as at this point I am completely bewildered…
Many thanks for your response.