What happens if trade loss is larger than entire account value?

Beginner Questions
1

Hi all

Ive just started trading on a demo account at forex.com and was just wondering, since the leverage is so high, what happens if a currency crashes and the loss would be greater than the amount of money thats would be in my account??

Thanks

Ben

2

the broker will automatically close your position once you no longer have enough funds in your account to maintain the position. Its called a ‘margin call’

3

The term “margin call” is a bit misleading in the retail forex business. In stock market terms, it would mean a phone or email request for additional funds when the equity reached the danger level. At 2 to 1 leverage and the slow price movement, you usually had time to provide the funding and maintain the position. In forex, I doubt that the request would be made - the position would be closed and you would be notified after the fact. More like a “margin close” than a call.

4

As a newbie you should always be exercising ‘best practice’ ensuring that you are trading with small volumes and using stops to ensure that a margin call is never made!

5

The term I was looking in my earlier posting was “stop out” not “margin close”.

6

Most brokers have stop out rules but you should check your specific broker’s policy, as well as its policy on whether or not use can lose more than your account balance. They do not necessarily have to provide that protection, for example on a market gap that blows through the stop out point.

7

The broker will usually force liquidate the position well before the account reaches a balance of zero. Their will be a margin call and it will be instantaneous.

Now if the currency crashes and there is very low liquidity for the broker to exit your position and the liquidation of your trade happens to send your account balance to negative. Usually your broker will offer you negative balance protection, so you do not need to pay them for the negative balance. Although you should check with your broker. But then again you should not be placing such risky trades anyways.

In most cases the margin requirement and normal market conditions will ensure that they close out your trade before the accounts hits zero.