Lose more than your account?

Broker Discussion Forex Brokers
1

Hi

I’m about to open an account at Tradestation. However in the application form they have a section which says:
[I]“Do you understand the risks involved in margined transactions as it relates to your cutomary use of margin account, including the fact that [B]you may lose more than your initial investment?[/B]”[/I]

I have never heard before that you could lose more than you had in your trading account. I thought the system automaticly would close all my open positions when all the money was spent on my account. I know this is the worst case scenario but I think it is a nice precaution to have.

Is this normal?

cheers!
Michael

2

Hello, Michael

It is not uncommon for new traders to lose an entire account (sometimes several entire accounts), due to one or more of the deadly mistakes that newbies are prone to make.

It is VERY rare, even for newbies, to lose MORE than an entire account, and end up owing the broker money. But, it’s [B]possible[/B].
So, brokers cover themselves by warning you that it’s possible.

Here is one possible scenario. You hold a position over the weekend. On Friday evening, your broker closes for the weekend, and does not re-open until Sunday afternoon. During this time, the broker’s servers will not execute pending orders. On Saturday, some catastophe (natural disaster, assassination, terrorist attack, etc.) sends the markets reeling. Price overruns your stop-loss, which is NOT executed. On Sunday, when your broker re-opens, and his servers come back on line, your stop-loss is executed, generating a loss larger than your entire account. You now owe your broker some money.

So, before bad things happen, what should you do? Well, as part of your DUE DILIGENCE, you should learn what your broker’s policies are regarding (1) initial margin, (2) maintenance margin, and (3) margin calls. Furthermore, you should inquire, by email or live chat, about terms and conditions which confuse you, or concern you. This thing about losing more than your account obviously concerns you; so, have a talk with this broker, and get him to tell you what scenarios might put you in that position.

Due diligence is your responsibility. Nobody can do it for you. After you have done your due diligence thoroughly, you will find that the CONTRACT your broker requires you to sign is totally one-sided. Surprise, surprise! That thing was written by your broker’s lawyers to protect the broker, not you. You can do the most careful due diligence in the world, and you’ll still have to hold your nose when you sign that contract.

Some brokers require you start the account-opening process, before you get to see the Terms and Conditions you’re going to have to agree to. Other brokers post it all on their websites. You not only have a [B]right[/B] to all of this information up front, but, due diligence means that you have an [B]obligation to yourself[/B] to get all of this information up front.

Be proactive. Demand the answers you need.

3

I blew my account back in May when I left a bunch of positions open on the EUR/USD over the weekend, and the price moved 200 pips against me. Luckily for me, my broker carried the trades for me for an hour or so when my account balance dipped below zero…and then closed them when the account was above water. I was left with $13. :frowning: Could have been much worse. I read their terms and conditions, and noticed that they had a “no negative balance” policy in effect, and were true to their word on that.

I was still extremely upset and fought with them about it, insisting that my stop-loss should been honoured…but in retrospect I understand now that they were right. Lesson learned: Never leave positions open over the weekend.

4

just clear out what exactly does that mean. and if the broker will not give the definite explanation, just choose another one

5

Exactly;) !

6

Thank you all for your input.

I made some more research on various forums and talked to a representative from Tradestation who told me that it could happen but were VERY unlikely. As you wrote Clint it’s just to protect the broker.

When I think of it, contracts of any kind will always be very extreme in their words to cover any situation which could arise and why should contracts with brokers be any different.

Due diligence and then follow your gut feeling.

I have decided to go with Tradestation. I will close all trades prior to weekends and then of course practise money management (e.g. 2 and 6% rules).

Again, thank you all.

Regards
Michael :slight_smile:

7

so what’s the point of having a STOP-LOSS if it’s not gonna work?? this could happen during a weekday trade then if the market suddenly rockets due to some news\event and a STOP-LOSS is not triggered?? might as well not employ one???

8

How did you draw that conclusion from what’s been said, so far, on this thread?

It’s ridiculous to conclude that a stop-loss is useless, just because it CAN fail to protect you in certain extreme circumstances.

Let’s get real.

Most of the time (maybe 99% of the time?), if price moves to your stop-loss, your trade will be closed at — or very near — the price you have specified.

Occasionally, price may blow through the level of your stop so fast that some [B]slippage[/B] occurs and your trade is closed at a worse price than you intended when you placed your stop-loss. This isn’t fun, but it’s better than letting price run even further against you.

Slippage is kept to a bare minimum by reputable brokers. If you think that you are suffering unreasonable slippage, confront your broker and get answers. If your broker can’t or won’t give you satisfactory answers, then shop for a better broker. (Some brokers claim NO SLIPPAGE. Don’t accept this claim at face-value; do your own due diligence, and find out whether this claim is believable.)

For most of us, holding positions over the weekend is a bad idea. Exiting on Friday afternoon (or earlier), and getting back in on Sunday (if the trade still meets your criteria), will cost you a LITTLE money; but the cost is [B]cheap insurance[/B], compared to the cost of a market-moving weekend event. Such a market-moving event, while your broker is closed for business, is rare, for sure. It’s also rare that your house burns down — but, you wouldn’t own a house without fire insurance.

There are some traders who [B]always[/B] hold positions over the weekend: [B]long-term swing traders[/B] (who may stay in a trade for weeks or months), and [B]position traders[/B] (who may stay in a trade for months or years). These traders are typically prepared to ride out far greater price volatility than you or I would ever tolerate. And, for these traders, possible price gaps on the weekend are easily within the volatility range they expect to ride out.

Could some extreme event wipe out even these traders, with their deep pockets? Sure. If a dirty bomb ever goes off in Lower Manhattan, or in the City of London, many of those guys — along with their brokers — will become instant paupers.

And some others will become instant masters of the universe.

9

Well said…

This is just standard procedure and like Clint says, the chances of it happening are very rare indeed.

Pipster