Let’s say one had $250 in their account and used leverage of 200:1, if the trade produced a loss would you lose just your $250 depending on how many pips the trade went down? Is using leverage similar to a loan? In my example above would someone have to pay more than the amount in the account?
Thanks,
Jamie
While in theory you could lose more than the initial $250 account balance, the automated margin call process most brokers have in place would prevent that happening. Always check your broker’s specifics there, though. There’s variation.
Click on the School tab up there. Go on. It won’t hurt. 
And if you want to learn about leverage really quick there is a section in the school for it under “College: The number one cause of death for forex traders”
Margin call will stop all your trades, and it will return the margin you used to your account, so you can never loose more than your account balance minus used margin. So, If I have 250 dollars in my account, with 200:1 leverage, and use 100 dollars of margin to open a position of 20,000 units and things go bad for me, the most I could loose is 150 dollars before margin call kicks in. In no way can you be leagaly required to pay any more than your account balance at margin call with retail Forex.
This is not necessarily the case. Some brokers will guarantee that, but not all of them. That’s why it’s important to read the brokerage documents.
As far as I know, all Forex brokers do margin calls. A negative balance is never going to happen. Remember, when you get a margin call, your used margin still returns to your account, so its not even possible to loose all of your money.
They all do margin calls, but that alone is not a guarantee you don’t lose more than your account balance. Imagine being short USD/JPY at 100 on Friday heading into the weekend. Over the weekend Tokyo is devastated by an earthquake. USD/JPY jumps to 110 when trading starts in Monday Asian trading. If you’re leveraged at 20:1 you’ve basically just lost twice as much as your account was originally worth. Now, whether your broker sticks you with that big loss or not is based on the broker’s guidelines.
This scenario simply will not happen with any retail forex outlet. No matter how fast it jumps to 110, the software will close your positions when it sees margin call, leaving you with your used margin left in the account. If the software issues your margin call @ 102, then the price jumps to 110 in a few minutes, that extra 800 pips is lost by the broker to the liquidity provider that they used, and they simply swallow the loss. Im not saying that there isn’t a forex broker that theoretically could claim that their client owes them money, I’m just saying that the law would be on the client’s side. And nobody should even have to worry about margin calls or negative balances in a disaster if they use proper money management.
Under [I]normal circumstances[/I], a negative balance will not occur in a retail forex account.
But, it’s silly to say that it can’t happen, or that it won’t happen, or that the law will come to your rescue if it does happen.
The CFTC’s Proposed Regulations for retail forex, which WILL become law this year, recognize that it is possible to lose all of your account AND MORE.
The CFTC’s Proposed Regulations will require all RFED’s (those lovable folks we used to call brokers) to provide a Risk Disclosure Statement to all retail customers. Here is the first paragraph of that Statement, as it appears in the Federal Register. I have highlighted one sentence in red:
Risk Disclosure Statement
OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS INVOLVE THE LEVERAGED TRADING OF CONTRACTS DENOMINATED IN FOREIGN CURRENCY CONDUCTED WITH A FUTURES COMMISSION MERCHANT OR A RETAIL FOREIGN EXCHANGE DEALER AS YOUR COUNTERPARTY. BECAUSE OF THE LEVERAGE AND THE OTHER RISKS DISCLOSED HERE, YOU CAN RAPIDLY LOSE ALL OF THE FUNDS YOU DEPOSIT FOR SUCH TRADING AND YOU MAY LOSE MORE THAN YOU DEPOSIT. YOU SHOULD BE AWARE OF AND CAREFULLY CONSIDER THE FOLLOWING POINTS BEFORE DETERMINING WHETHER SUCH TRADING IS APPROPRIATE FOR YOU…
And the Statement continues from there.
You can read the entire Risk Disclosure Statement at — http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2010-456a.pdf —
see § 5.5 on pages 3312-3313.
This is all true, but if a Forex broker that uses the policy of margin call claims you have a debt to them, you can simply send them a written statement saying that you don’t owe them anything, and you would be backed up by the fdcpa and any other laws that are provided by individual state legislatures. But none of this is really relevant to anybody here, because we all use proper risk management, right?
I wonder how the CFTC got it so wrong. You should write to them, and set them straight.
Assuming that demo accounts follow the same rules…
Back while demo trading I had a large trade open over the weekend and there was a large gap that left me in the negative when trading resumed. So it does seem to be possible and since leverage is in essence a loan, would’t the broker expect to be paid back when you lose their money?
That is why pending orders can be skipped if placed before a gap. If the broker’s server’s are offline during the weekend then they cannot execute a margin call. I am sure that this is in the fine print of many account agreements.
This is a great forum where people can share their ideas in an open environment, however nobody appreciates receiving acrimony for their opinions. If you think I’m incorrect, or you misunderstand me, thats fine, but sarcasm is unnecessary and childish.
Sarcasm? Nah. Just giving in to your insistence that you know more about these things than anyone else here.
As for childish, I’ll tell you what’s childish: demanding to be RIGHT, when facts and logic prove that you’re WRONG.
So, somebody is over-leveraged, they get a margin call a little too late, Their brokerage does not have debit balance protection, and they end up with a negative balance. The brokerage then has their way and legally forces the client to pay. I’m not saying that this is impossible, but it certainly is not a regular thing in Forex and it isn’t something that the person that posed the question should loose any sleep over. I also don’t like arguing or debating or whatever this is supposed to be. :rolleyes: