This weeks “Swissgate” events have gotten me thinking about how we store our money on our Forex accounts.
Let me explain what my current thinking/question is.
[B][U]The Situation[/U][/B]
Mr X has a £5000 balance in his account and trades 2% per trade (£100). He sets his stop loss and contract size so that his SL cuts his losses at £100 as he likes good money management. His required margin for this trade ~£35 also meaning that a maximum of ~£135 of his equity can be used up on this trade. As he has £5000 he thinks this is good money management and is happy with these numbers.
This is his only live trade at the moment and (as it would turn out) will be his only live trade for another week or so.
Then something like “Swissgate” happens. It goes so far against his trade that he loses £8000 on that trade alone. His broker will reset his account to £0 meaning he won’t owe them anything but he has lost his £5000.
[B][U]A Solution?[/U][/B]
If he knew he only needed ~£135 for that (or any other) trade (or say that every tarde he ever makes require between £110 - £160) then why not just have ~£300 “loaded” into his account at any time and the rest nice and safely in his own bank account?
Deposits nowadays are extremely quick and can be added to at any time meaning he always has a couple of trades worth of free equity available at anytime. The advantage, of course, is that when it all goes wrong and he loses £8000 then he loses the money in his account but it is so much lower.
Hope that made sense.
[I][B][U]What have I missed in my thinking here? [/U][/B][/I]
Simple solution for you. Open a sub account. I don’t know about other brokers, but I use Oanda and I can have up to 10 sub accounts. If you are worried about another “Swissgate” (love the term by the way lol), open up a subaccount and only keep the amount of money necessary for the trade/trades you are taking and leave all the excess money in a different sub account. You will need a little extra cash in the account with the trade/trades in it just to keep yourself from being margin called, but not 98% of untouched cash if you get what i am saying. Wouldn’t be hard at all to calculate exactly how much extra cash you would need to keep your margin healthy… but on the bright side, if you lost money in the actual trading account, you can just transfer some extra cash from your sub account. If you make profit in the trading account, you can also just transfer the cash into the other sub account. I think I am actually going to take my own advice on this one, never really thought about how to protect myself in the future, and this seems like a legit way. Only issue is broker insolvency and getting out all your money in that event.
That sounds new to me. I was under the assumption they had safeties in place so that you where unable to go in the red. Technically they are supposed to close your trades at 50% loss via margin call. Is there a new law now or something?
Your broker is facilitating your trading in the markets so if you take on a trade with 1000$ in your account and you get a move like we saw from the SNB and you end up with negative 1000$ in your account, why would the broker be liable for that 1000$?
Unless your broker is a market maker and did not pass on the trades he is now owing 2000$ down the line and your account only has 1000$ to cover it.
I believe it would be more the exception than the rule that a broker would reset a negative account balance but if you are worried I would suggest asking your broker about their policy on the matter.
Having multiple accounts in the same broker is not going to save you from a possible bankrupt by the broker. You need more than what you are going to use for trading, because most brokers require that your position remains above 30% to 50% of your equity or they close your position automatically. What happend with the Franc was that stop losses were not triggered until the price had dropped more than 30%, therfore those traders suffered losses that were way higher than their expected risk and the brokers had to cover for the loses of their clients.
The usually do, but what the SNB did last week on Thursday plunged many account into a negative balance and market makers who took the other side of the trade. This has caused a sharp drop and brokers were unable to honor SL’s which is why some of them already announced bankruptcy filings such as Alpari UK and Global Brokers NZ while other such as FXCM received a bailout in order to stay in business. I don’t think it ever happened like this before which is why it is new. There is a 0 Account Protection Policy which brokers have, but I doubt they ever used it before until last week.
I guess it works if you only have £5k. Depends though on the time frame you use, the shorter the time frame, the more chance there is that your deposit won’t reach you in time. Here’s a quote from an article that might answer your question:
##One protection that some people propose against cases like this would be to just keep enough money in your trading account to satisfy the margin requirements. I have mixed feelings about it, as it sounds more like gambling than professional trading. On the face of it, it’s true, you can’t lose what isn’t there.
On the other hand, it also seriously impedes your ability to trade. First of all, the debit/credit card deposits which are the fastest one, still take up to one business day to appear in your trading account. So even with the fastest deposit method, you might not have the money there when you need it. More importantly though, there’s normally a maximum $10.000 that one can deposit via debit/credit card in a calendar month and that forces one to remain forever in the little league of traders.##