Question about margin trading

If you were to make a trade with say, one standard lot, using 100:1 leverage (i.e. you are only putting forth 1,000 units of your own money, or of course the equivalent of the currency you are buying), and you lose THE ENTIRE LOT, do you now owe your broker/someone the amount of that entire lot, e.g. 100,000 USD?

In other words, if margin trading is effectively trading with borrowed capital and using your own money as a “deposit”, what happens if you lose all the borrowed capital?

Start here :slight_smile:

To answer your question, “only in theory”.

In practice, you trade with something called a “stop-loss” which means that your position (normally) closes itself if it moves some pre-specified distance against you. In this way you can control and limit your risk.

When you open the trade, you have a reason for it, and you decide at what level you want the trade to be closed automatically if it’s moved against you, on the grounds that that amount of price movement the wrong way would make your reason for being in the trade no longer valid. You wouldn’t want to be in a trade for which the entry reason was no longer valid, would you?

(You can also choose to override that and close a trade manually whenever you want, or indeed adjust the position of the pre-set stop-loss as the trade progresses.)

Additional tip: long-term successful trading is [I][U]all[/U][/I] about understanding risk-control.

In forex you’re talking about relationships, not assets. As such, there’s really isn’t any such thing as losing the entire lot.

If that’s confusing, it gets worse. In theory you could experience a loss greater than the notional value of the position you enter. Say you go short EUR/USD at 1.20, meaning a $120,000 trade with a $10 pip value. If the market rose to above 2.40 you would lose more than $120,000. This is obviously a highly unlikely scenario, especially for the major global currencies.

In other words, if margin trading is effectively trading with borrowed capital and using your own money as a “deposit”, what happens if you lose all the borrowed capital?

Margin trading in the forex market is NOT trading with borrowed capital. It’s better to think of it as betting on price direction, with your margin deposit acting as a cushion (for the broker) against you taking a loss.

To answer your broader question, if you lose more than your margin deposit you will, in most cases, owe your broker the difference. There are some brokers with a “no negative balance” policy (or at least there was before the CHF issues last year). You’d want to check your broker agreement.

To lexys’ point, in the vast majority of cases you will not get to the point where you face a loss larger than your account balance (again, the CHF events being an exception). Either your own stop loss will get triggered, or an automated position closure would happen via your broker once a certain minimum level of available margin funds is reached.

The point made above by John Forman (rhodytrader) cannot be emphasized too strongly.

John is exactly right that a position in the retail forex market is a bet on price direction. If you take a LONG position, regardless of size, you are simply betting that a particular currency pair will rise in price. If you take a SHORT position, you are betting that the pair will decline in price. The MARGIN required by your broker, which is a fixed percentage of the notional value of your position (bet), is intended to ensure that any loss which might occur in your position will be covered with [I]your money,[/I] not with the broker’s money. Your broker has no intention of lending you any of [I]his money,[/I] or letting you lose any of [I]his money.[/I]

In retail forex trading, there is no borrowing of money, and there is no buying or selling of individual currencies or currency pairs.

The [B]erroneous[/B] concepts of (1) “borrowing” the leveraged portion of your position, and (2) “buying” the base currency and simultaneously “selling” the quote currency (or vice versa) — these concepts are [B]poisonous[/B] to new traders who are just learning this business. The longer those concepts rattle around in your head, the longer you will be confused.

I apologize, if the above turned into a bit of a rant. But, the concepts of trading with borrowed money, and buying and selling currencies, continue to circulate throughout forex education sites, [I]including this site.[/I] The [I]Babypips School,[/I] which is excellent in most respects, nevertheless implies in several places that[I] buying and selling, using borrowed capital,[/I] is part of this market. [I]Babypips[/I] is wrong about that.


Ok, I think I’m beginning to understand. So, let’s say I were to go long GBP/USD at 1.3000 with 1 standard lot, and my margin was again 1%. Now let’s say it went down to 1.2870 (which I understand is unlikely). Because the price decreased by roughly 130 pips, I would be losing the value of my margin (1000 dollars)? And then as you and some others said, at this point my broker would either cancel the order, or I’d begin to have a negative account (assuming I was not using a stop-loss order at any point)?

So essentially,[B] if your broker did not allow negative accounts[/B], you could trade with any size lot, so long as you have the money to fill the margin % allowed to you, and in a trade, the only amount of money you could “lose” is the amount in your margin?

Thanks very much for the help

You have it backwards.

[B]In almost all cases, your margin is the only portion of your account that you can’t lose.[/B]

Let’s use an extreme example to illustrate this.

Let’s say that you had $10,000 in your account, back in January.

On January 20, you decided to go LONG one standard lot of USD/CAD at a price of 1.4600.

Your broker set aside $1,000 of your balance as required margin for your $100,000 position (assuming 100:1 leverage / 1% margin).

For whatever reason, you decided not to use a stop-loss.

Then, you fell into a coma, and for the next 30 days, nobody was monitoring your position.

USD/CAD went into a prolonged decline, beginning right at the time that you went LONG.

As the pair declined in price, every pip cost you $10.

On February 4, while you were still in a coma, USD/CAD hit 1.3700 — 900 pips below your LONG entry price — at which point [B]your loss amounted to $9,000.[/B]

Before your accumulating losses started to eat away at your MARGIN, your broker closed your position.

When you awoke from your coma later in February, you had lost all of your account EXCEPT your margin.

And USD/CAD was just getting rolling to the downside. If you had started with a larger balance, say $20,000, and if your coma had lasted 3 months, instead of 30 days, [B]you would have lost $19,000,[/B] when USD/CAD hit 1.2700, and only your $1,000 margin would have been left in your account.


One can go into coma after such a result of trading instead of recovering from coma to see such a loss in his account :wink:

Quick correction. In the case of a broker which has an initial margin (what you first have to post) and a maintenance margin (what you have to keep posted - often 50% of initial) then your losses would eat away at your margin before the automated stop out.