The market never ceases to surprise us with its volatility, captivating moves and possible profits. It is important, however, to use risk management techniques to keep your trading account safe. One of the techniques often overlooked is the negative balance protection policies of the broker you trade with.
Negative balance protection ensures that you will not have to deal with possible losses that literally go over the invested capital. Without it you remove the safety net and expose yourself to a possible debt issues during volatile market conditions.
Forex brokers that offer negative balance protection allows you to not worry about owing the broker any money in case your account drops to negative balance. The last thing you need is to see -100k and your broker doesn’t annul it.
A good forex broker stands strong with a real transparency and fairness to its customers taking the integrity one step further by forgiving the negative balance of its traders when the clients are unable to close the positions fast enough.
At the same time, it is wise to keep in mind that over leverage that some traders choose are simply out of hand. While 100:1 leverage is still in the range of sane, some brokers go beyond possible and offer maximum of 1,000:1, which is purely a suicide.
The market has gone crazy with the latest China development and with the unprecedented volatility comes turmoil and possible negative balances and as a responsible trader you must check the policies of your broker and whether you are covered.
Do you remember what happened back in January 15th, 2015? Let me remind you of Black Thursday. Swiss National Bank removed Euro peg, resulting in negative balance. Some brokers forgave their client’s debt, while others hunted payments as the companies themselves lost huge amount of funds.
Here are just couple of examples in the past:
Saxo Bank reportedly took hard actions against its customers blaming them for the losses. The broker retroactively repriced traders and chased its clients for about $100 million of lost money!
Abshire Smith and CMC demanded clients to pay up negative balances, sending out email letters requesting to comply.
The higher the leverage you choose to trade with, the bigger is the possibility of the large negative balance, simply because you owe more than the amount you have in your account.
Some brokers will make sure to get their money via court and debt collectors. The brokers make sure to recover their money and go after the clients in every way possible because it’s likely that they own money to its liquidity providers.
How to be protected from negative balance?
Transparent brokers commit to prevent negative balance from happening either by using Margin Call level, which makes sure that traders’ balance doesn’t go below zero, or the policy of “forgiving” negative balance all together. Go over your broker’ terms and conditions in order to find out whether you are protected.
While traders usually assume that forex brokers forgive the negative balance, unless it is written down in the broker-trader agreement, there is not much you can do in case it really happens.
Negative balance protection is especially important for traders who use ridiculously high leverage. Do not automatically assume that your broker offers negative balance. Also keep in mind that the broker holds the right to alter the terms and conditions and not necessary inform you of it. Therefore it is possible that you have signed with the broker that offered negative balance protection in the past but doesn’t do so any longer.
At the end, losing money is a bad thing but what can be worse than not only losing your entire account but actually own money on top of that?! A lesson needs to be learned from the past experience and traders must pay attention to the terms and conditions your broker has. Those policies can be rather boring to read, but you just have to overcome the boredom and take care of your money. After all, you have joined forex trading to profit, not to own money you don’t have.