I’m very happy to be a part of Babypips. This is my main source of education, as well as some youtube videos and Google searches when I don’t understand something.
Unfortunately I don’t understand something 100% regarding leverage. I understand like 100:1, 50:1, etc. I understand also that the broker “borrows” you money.
I’m very early in my learning but have been using a demo account to try to understand the way that certain things are shown. I’ve read that a (good) broker would automatically close your account if you are losing too much. However, with the demo I’ve seen that I might have -$150 (even more) and then an hour later I’ve gone up to +$250. I’m yet to learn about margins, charts, resistance, etc, so hopefully in the future I’m able to avoid going in the negative for a long time, whether it’s an hour or a week.
My question is basically… Does the broker close the trade when you run out of your available margin or what? Because what if your trade closes automatically but then a few minutes later the line on the chart moves in your favor? Do you lose your margin + the potential profit that you could’ve made?
I saw that an online broker wrote “You could lose more than your deposit” on its website. I’m okay losing money that I can afford to lose but I don’t want to owe the broker AND lose my deposit. I guess that I could put an order in to close my loss, but actually I don’t want to because, again, what if the line of the chart goes in my direction?
Yes, the broker closes your trade when your account equity reaches the margin stop out level or your stop loss as determined by you.
If the margin stop out level is 50%, and your margin is $200 for the deal, when your equity reaches $100 which is 50% of your margin, then your trade will close automatically. you dont want to trade to margin stop out. always make sure you have enough balance and equity.
The broker does not lend you any money. This is often the way that it is explained for education purposes but no money is being lent.
You are trading margin for margin. Your margin is just collateral. Leverage allows you to buy assets of a much larger value than the amount of money you have in your account. Any adverse price movements are deducted from your equity as if you owned the asset at the nominal (full) price.
EU regulated brokers have negative balance protection, which means that you can not lose more than what you have deposited.
In theory, yes but in practice it can be very different because there is a thing known as latency and slippage.
This means that the price you get is very different to the price quoted on the platform.
In a fast moving market, when liquidity is thin, your order may not be matched at the price you want or at the 50% margin stop out levels price, You could end up with a far worse exit price than imagined and this might result in your account going in to negative territory…
Many traders have ended up way in to negative territory as a result of flash crashes or black swan events.
During times like this, the market is moving so fast, or the price even jumps and skips prices that your order cant get executed in time or at the price to honor your margin stop out level.
Huge leverage can be disastrous, trading under capitalized on razor thin margins just amplify’s the potential for disaster.