Negative Balance Protection

While highly leverage allows traders to make impressive profits when the markets move in their favour, this also means that traders can also be exposed to heavy losses should the market move against them.

Negative balance on forex trading account could happen if there are no “brakes” to stop excessive losses. Those “brakes” could be Margin Call or Stop Loss setups. However, sometimes even such tools are useless. In the event of lack of liquidity and fast-pacing volatile market, it may not be possible for a broker to close a position at trader’s stop loss or at the level where they have no remaining equity.

It is very rare, but unfortunately it happens. For example, EUR/CHF dropped more than 40% in January 2015 in just a few minutes. The result was numerous complaints of deficits both in trader and broker accounts. In global technical failure like this, it is up to each broker to decide whether they are going to respect client’s stop loss (if any) and erase negative balances or not.

This can lead to traders facing negative balances, essentially meaning that the trader owes the brokerage money. Some brokerages will pursue clients to recover these negative balances. Some of them may fail to do where the broker and their client reside in different jurisdictions. Others will decide simply to erase negative balances or follow the negative balance protection policy, even if there isn’t such clause in their terms and conditions.

In order to secure your funds in the best possible way, we recommend that you choose a forex broker whose terms and conditions include a “Negative Balance Protection” clause. This means that the stop out level on your account is in place to help ensure you do not lose more money than your deposit and your account will be brought to a zero balance if it goes into negative as a result of trading activity.

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