I understand that the downside of leveraging is that if a trade goes horribly wrong then you could lose a lot more than the original investment. Therefore my question is this: Assuming I follow good risk management - trades limited to 1 or 2% of balance, no more than 1 or 2 open orders and stop losses, is it still possible to end up with a negative balance and having to pay more money to the broker to settle debts?
If you look at your account you’ll see what margin you’re using and what margin is available. Most brokers will start warning you once you’ve moved past 50% of your available margin. Once this gets to 100% your broker will automatically close your trades, leaving you with $0 balance.
So, unless there is a big gap at opening that shoots past your SL and triggers it at a much lower price then you should be protected from owing your broker money.
Ok, so it sounds like its unlikely but still possible. The reason I asked is that i’m looking at a broker (IC Markets) which has low cost, but no negative balance protection. I think I’ll look for a different broker.
well if you use a stop loss this should help manage the risk. Also if your broker is regulated properly you should have negative balance protection unless you have registered as a professional Trader then you don’t get that benefit.
When your Margin stop out is activated your balance is not 0 so you should still have a minimal balance left above 0. Margin call at 100% Stop out at 50%.
Best advice if you want to use IC as maybe a lot of traders are thinking because they still offer 1:500 leverage (as far as I know) is don’t deposit more than you can afford to lose !!!
Keeping in mind, this ‘protection’ is more for the broker, not the retail trader. I couldn’t imagine the headaches related to trying to collect debts from every retail trader who owed money to the brokers, which would be 99% of them, not to mention the expense of chasing them down.
It would simply not be worth it for the broker to not have these measures in place.
Very many retail traders who had trades open with CHF found themselves in negative balance 5 years ago - Jan15th 2015 to be exact.
Guys who wished to maintain their credit rating found themselves in a dilemma - it was after that event that some brokers offered negative balance protection as a marketing tool.
All it takes is a gap thru a sl - some brokers offer a guarantee stop - usually at a cost in spread but worth researching…
Edit: btw quite a few brokers pursued negative balances in 2015 with all sorts of threatening letters - some quite nasty.
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Just an afterthought - I was in a CHF trade just before the above mentioned but luckily exited in time.
I had learned from a really old trader long since dead, he wrote very little.
In a book written shortly before his death he spoke of a time SL. The SNB had pegged CHF thus it seemed that retail traders had the power of a Central Bank behind their trades, you couldn’t get safer.
I remembered Livermore’s advice - a trade exceeding time needs to be exited just as much as a trade exceeding price:
I had to settle a very small negative balance on my original account that I got a margin call on. I guess there was enough slippage that the trade closed below my balance, a black swan event like we’re having now could easily have a much larger negative balance.
ICMarkets didn’t pursue me at any point, I just couldn’t start a new account without settling this balance, more than a year later. If the balance was larger than £3, then they may have tried to chase me down…
Yes I think have a look around
Leveraged products are a bit tricky to handle, you never know when they start drowning your investment. The negative balance is a situation in which you may incur losses more than the amount you have deposited in your trading account. The situation is now you are under the debt of your broker which is really bad news for a trader. I suggest you to always open an account with a broker who provides negative balance protection so that you don’t have to owe anything in case of huge losses.
If you are using a regulated broker, you will never see negative balance in your account. In case the balance goes negative, your broker will compensate for it.
You should not be worried about that if you are using a broker that offers negative balance protection. I don’t have that problem with Forexchief. I once had a negative balance when I started, but was cleared after I contacted support about it.
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I use the same broker. It guarantees fund safety in case of a technical glitch on server end. It offers a compensation should such a case occur.
No matter how you look at it, I think if you use a broker that offers negative balance protection I think you won’t be worried about being indebted to a broker. Many brokers including Forexchief does offer this feature.