What you say Negative Balance Protection is GOOD?

For Forex Trading, what you think Negative Balance Protection is GOOD? Is it necessary or not? How it is helpful to minimize loos rate specially for newbie…

It protects your account if prices move quickly or gap against you. Even having a set stop-loss will not prevent such damage. A guaranteed stop-loss will protect your position and the broker will honour your exit price no matter what, but the GSL must be paid for at the start of each trade and once its in place it cannot be altered. NBP is free and is backed up by legal protections beyond the contract with the broker.

i don’t think its necessary, but is a good asset!

Do you understand what it is?
If you ever are the wrong side of a black swan, then you’ll think it’s a necessity

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Totally agree with you. I also thing its very important because without negative balance protection it’s dangerous to minimize lose rate.

Exactly, it’s easier to minimize loss rate with negative balance protection and not many brokers offer this today, which is why I had to give up on so many brokers, at the end only one – coinexx was able to satisfy my requirements.

well every regulated broker should offer Zero balance protection.

i have to jump into this discussion and would like to ask you, as someone who knows a lot, a question concerning negative balance protection:

Does the broker pay the negative balance, from which he protects me, to his liquidity provider? Lets say i am in position 1000 USD long at the end of the trading session, spx gaps down at the opening session, i would be in minus with 3000 USD, but i only loose my 1000 cause there was not more in the account and i am protected from negative balance. Thats negative balance protection.

But who pays now the 2000 USD and to whom? Does the broker has to pay allways the negative balance of his customers to his liquidity provider? This would lead to his bankrupcy sooner or later…

Or does negative balance protection never affect the brokers income? If this would be right, than each broker could offer that feature, but thats not true.

From the client’s point of view your questions are logical but irrelevant, providing the broker also must abide by the other constraints imposed by a decent regulator -
not trading against clients
deposit protection
funds segregation

Thanks, the reason why i ask is, i had to search for a new broker with this protection and found in a clients agreement of another broker (who offers this protection in general) that negative balance protection is not granted, if a client speculates on opening gaps or on high volatility news release (NFP, GDP…). Thats a little bit strange and lead me to the conclusion, that brokers have to pay the protection with their own funds, and therefore want to get rid of customers who use this kind of protection frequently with gap and news trading cause their accounts always need to be protected.

There is a risk with leveraged CFDs (and rolling spot FX contracts) that retail traders may lose more than what they deposit into their accounts, which means they now owe a debt. A lot of new retail traders do not understand this risk.

The real purpose of negative balance protection (NBP) is to alter the behavior of the CFD provider.

If the CFD provider is operating inside a regulatory jurisdiction that requires it to cover any negative balances of its customers, this disincentivizes it to encourage traders to take on massive leverage.

If your CFD provider is not hedging its risk when it takes the opposite side of your trade (“B-Booking”), then it prefers you actually use high leverage, because smaller price fluctuations will stop out you faster (assuming you set a stop loss), or you end up with a negative balance (if you don’t have a stop loss), in which you now need to deposit more money since you owe the CFD provider more than your initial deposit. Either way, it profits.

With negative balance protection, the CFD provider is now limited to making a profit from your initial deposit. It can’t come after you for more, which is a good thing. Your losses are limited to the funds in your trading account.

And since this is the case, the CFD provider will implement a Stop Out policy, that will auto-liquidate your position(s) if your unrealized losses rise to a certain level prior to losing all your money.

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Most likely not.

Imagine you and I make a bet. The winner gets $200.

I win.

But you only have $150. You now have a “negative balance” with me of $50.

I’m not “going to pay myself” the $50 that you couldn’t pay.

I still pocketed your $150 so I walk away happy. :grinning:

Thanks-now we come closer to the point i am driving at: does it mean, that a CFD provider who offers NBP, is loosing money when i win? There are CFD provider, who earn money with spreads, independent of the success or failure of their clients, or has it nothing to do wether he offers NBP or not?

It all depends on how they manage their risk exposure. If they B-Book your order, then yes.

If they’re hedging all their risk, then they do earn just from the spread. But if their customers are trading micro lots, that’s a very tough way to make money. You’d want your customers to 1) trade big (leveraged) and 2) trade frequently (intraday trading).

Both may not be in the best interests of the trader.

The reason for my asking is as follows:

i traded with a broker, and used a strategy where negative balance protection cut my losses on one position whereas on the other position i drove in profits. A kind of hedge strategy, where i took one position short on DAX30 CFD seconds before end of trading session against 22.00hrs., and same time on another account (same broker) one position long.This was not forbidden.

When DAX gapped in the morning (mostly i traded that from friday end to monday opening) if the gap was huge enough one position drove in profit, while the other had limited loss to my deposit- cause of NBP.

Several times i made so easy money,( but not more than some hundred EUR cause i had not more funds to invest), and the broker cancelled my account.Thats the reason why i was wondering wether this kind of trading costs the broker too much momey.

The interesting point:
When i was searching for a new broker, i found one who offered also NBP, but he had a special rule in his client agreement, where he said, that this behavior (opening hedge positions seconds before the end of trading session), is “unauthorized activity” and “hedging in bad faith”…

Thats the sentence in his agreement, in black the part that refers to the problem:

8.2 ‘Unauthorised Activity’ means any act, including but not limited to:

e. Hedging in bad faith. Hedging is a strategy used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies, or securities. In effect, hedging in bad faith is the employment of various techniques but, basically taking equal and opposite positions in the same Financial Product or a Financial Product highly correlated at near the same time, indicating no interest in genuine trading. This can happen over a single account or over multiple accounts.

f. Use of excessive leverage. Excessive leverage is the opening of a position that requires a margin that is nearly all of the free balance. This strategy significantly heightens the danger of the clients’ account ending up in a sizeable negative balance.

j. Multiple Account Operation. Clients may not trade using the accounts of others or allow others to trade using their account.3 Evidence of this activity includes (i) accounts operating from the same location, (ii) using/indicating the same IP address, (iii) multiple accounts displaying the same deposit and withdrawal patterns, (iv) accounts showing similar or identical trading patterns or (v) accounts sharing the same device. Where this activity is discovered, the Company reserves the right to close the affected accounts and all related open trading positions

i. News Gap and Break Gap Trading Abuse. All products observe a break either intraday, daily or weekly. It is the norm that the last price before the break and the first price after the break to be significantly different. This difference, also known as a ‘gap’, means there is no market (no tradable prices) in that range. A gap can also be the outcome of news release. The Company is proud to offer in its Proprietary Platforms and mobile apps a guaranteed stop loss, take profit, pending order execution and negative balance protection to protect and enhance the trading of its clients. Negative balance protection is offered on all Platforms. Nonetheless, it is prohibited to use these features in bad faith. Examples where these features are used in bad faith are: I. Positions opened minutes or even seconds before the break or news release, in an attempt to generate profits without the risk of market moves. II. Positions that are large enough compared to the balance of the account, in an attempt to either generate profits or end up in a negative balance, which the company pays on your behalf. III. Simultaneous positions in the opposite direction (pending or marker orders), indicating no interest in the market direction.

That made me believe, that brokers in general drive in losses, if customers use often this NBP. It would also be interesting to know whether this kind of trading is not welcomed by brokers in general, cause than i know i will get the same problems when i do this with other brokers.

The solution would be to trade the long position with broker A, and the short position with broker B, both with NBP…

Negative balance protection is extremely critical. Without it many accounts would burn and so many traders would be indebted to their brokers. Not a good place to be.

Negative balance protection gives you an extra security cover. Not that it is necessary, but if your broker provides it, then no harm as well.