negative balance protection | Forex Factory

Options

Permalinks
Print Thread

Similar Threads

Brokers with Negative Balance Protection 41 replies

Broker limits with "Negative balance protection"? 5 replies

ECN broker with negative balance protection? 20 replies

Negative Balance Protection 14 replies

How does FxPro offer 'negative balance protection' on big lots 43 replies

negative balance protection

  • #1
  • First Post: Feb 6, 2006 1:23pm Feb 6, 2006 1:23pm
How is it possible for dealers to offer you this feature? What if your account can withstand say 20 pips w/max leverage and the market jumps by 50? Will they really not hold you to that 50? If so, isn't there a way to take advantage of this by making a highly levered bet right before big news in the hope that the move will be larger than your account can withstand, hence artificially lowering your potential losses but not limiting your gains?
  • #2
  • Feb 6, 2006 3:11pm Feb 6, 2006 3:11pm
Yes they will hold you. It's called a margin call. I don't know if all brokers do it the same way but my broker automatically closes out all open trades as soon as equity falls below 50% of margin required by those open positions. No fun.
  • #3
  • Feb 6, 2006 3:47pm Feb 6, 2006 3:47pm
Naturally i assume they will close out the trade, but what if you have $5k in your account and lose 10k in one instant market move. Supposedly you cannot 'owe' them another 5k if I just don't meet hte margin call and let them liquidate my position, at least some of the brokers I saw, or am I misinterpreting?



Quoting ejromero
Yes they will hold you. It's called a margin call. I don't know if all brokers do it the same way but my broker automatically closes out all open trades as soon as equity falls below 50% of margin required by those open positions. No fun.
  • #4
  • Feb 6, 2006 4:46pm Feb 6, 2006 4:46pm
Quoting gaash
Naturally i assume they will close out the trade, but what if you have $5k in your account and lose 10k in one instant market move. Supposedly you cannot 'owe' them another 5k if I just don't meet hte margin call and let them liquidate my position, at least some of the brokers I saw, or am I misinterpreting?
Yes, that is the way it works. But why would you want to risk 50% of your capital on one trade? Margin calls are for the brokers protection, not yours.
sxaxlxvxaxtxixoxnxbxyxgxrxaxcxexdxoxtxoxrxgx
  • #5
  • Feb 6, 2006 4:57pm Feb 6, 2006 4:57pm
On one hand I think even under extreme conditions it would be highly unlikely that a move would be so large as to trigger a margin call in a single bound. I mean, say you were crazy enough to risk your entire margin with like 400:1 leverage and entered a position in some USD quoted pair. You would be trading 20 100k lots where each pip move would represent a $200 change in value. It would take a spike greater than 25 pips to make you negative. Someone more experienced than I would have to say if they have seen that where it wasn't a computer glitch. On the other hand that's an interesting question that I don't see an answer for in my brokers information, but again, it may be purely theoretical.
  • #6
  • Feb 6, 2006 7:36pm Feb 6, 2006 7:36pm
Dont forget that broker rates, are essentially artificial rates, they can move them as they please if, so I am sure they have measures in place to counter this possibility.
You can quit and they won't care, but you will always know.
  • #7
  • Feb 6, 2006 7:54pm Feb 6, 2006 7:54pm
Quoting diallist
Yes, that is the way it works. But why would you want to risk 50% of your capital on one trade? Margin calls are for the brokers protection, not yours.
The idea is that I have many times that in capital but I leave a purposefully small amount so that my downside is capped by the negative balance protection....
  • #8
  • Feb 6, 2006 8:31pm Feb 6, 2006 8:31pm
Quoting gaash
The idea is that I have many times that in capital but I leave a purposefully small amount so that my downside is capped by the negative balance protection....
Even so, by doing this way, you're letting the broker be in control. Remember, the broker wants you to use high leverage. That is reason enough right there not to. You also mention counting on "hope" that the market will move in your favor. "Hope" is a bad word in trading that belongs in the trash along with "fear" and "greed". You also appear to be pushing for a single trade to give you the big win. Gunning for a big win does not lead to long term success. It is many small trades using a system with a positve expectancy, coupled with compounding that wins in the long term. Swinging for the fences is doomed to failure.
sxaxlxvxaxtxixoxnxbxyxgxrxaxcxexdxoxtxoxrxgx
  • #9
  • Feb 6, 2006 9:17pm Feb 6, 2006 9:17pm
I understand what you are saying, however, my question is whether or not there is a way to exploit the negative balance protection. The idea here is that when there is a big announcement pending that ought to move the market one way or another in a big way, take a random position with maximal leverage in one direction or the other. Your EV on this trade in the next instant is 0.5 * X - 0.5 * X = 0 (well slightly negative due to bid/ask, X is how much the trade moves either up or down, there is no reason to assume any bias in any direction); Now Let C = total capital in account. if X >> C then the EV is now 0.5 * X - 0.5 * C which is now positive EV. The question is how does the broker protect against this, or does this scenario simply never happen?


Quoting diallist
Even so, by doing this way, you're letting the broker be in control. Remember, the broker wants you to use high leverage. That is reason enough right there not to. You also mention counting on "hope" that the market will move in your favor. "Hope" is a bad word in trading that belongs in the trash along with "fear" and "greed". You also appear to be pushing for a single trade to give you the big win. Gunning for a big win does not lead to long term success. It is many small trades using a system with a positve expectancy, coupled with compounding that wins in the long term. Swinging for the fences is doomed to failure.
  • #10
  • Feb 7, 2006 8:55am Feb 7, 2006 8:55am
The only way to be at safe position is to not using too large lots. You should have in the deposit enough money to withstand the market shakes.
  • #11
  • Feb 7, 2006 3:29pm Feb 7, 2006 3:29pm
Lots size don't really matter as long as you're managing your risk properly.
I like sticking to 2% when I'm sober...

Quoting tomecki
The only way to be at safe position is to not using too large lots. You should have in the deposit enough money to withstand the market shakes.
  • #12
  • Feb 8, 2006 2:13am Feb 8, 2006 2:13am
Quoting gaash
I understand what you are saying, however, my question is whether or not there is a way to exploit the negative balance protection. The idea here is that when there is a big announcement pending that ought to move the market one way or another in a big way, take a random position with maximal leverage in one direction or the other. Your EV on this trade in the next instant is 0.5 * X - 0.5 * X = 0 (well slightly negative due to bid/ask, X is how much the trade moves either up or down, there is no reason to assume any bias in any direction); Now Let C = total capital in account. if X >> C then the EV is now 0.5 * X - 0.5 * C which is now positive EV. The question is how does the broker protect against this, or does this scenario simply never happen?
Oh! I see what you're asking now. I don't know the answer to that. My own experience is limited to the few margin calls I got many moons ago. Every one of them kicked me out of my trades on the pip that did it.

Perhaps someone with a better understanding of the margin call process can enlighten you (us).

Dial
sxaxlxvxaxtxixoxnxbxyxgxrxaxcxexdxoxtxoxrxgx
  • #13
  • Feb 8, 2006 3:52am Feb 8, 2006 3:52am
Quoting gaash
I understand what you are saying, however, my question is whether or not there is a way to exploit the negative balance protection. The idea here is that when there is a big announcement pending that ought to move the market one way or another in a big way, take a random position with maximal leverage in one direction or the other. Your EV on this trade in the next instant is 0.5 * X - 0.5 * X = 0 (well slightly negative due to bid/ask, X is how much the trade moves either up or down, there is no reason to assume any bias in any direction); Now Let C = total capital in account. if X >> C then the EV is now 0.5 * X - 0.5 * C which is now positive EV. The question is how does the broker protect against this, or does this scenario simply never happen?
The only we'll know is to try it. With the next big news I'll give it a shot. 777 had a thread similar to this, and he mentioned that your positions gets closed automatically when your margin is less than 50%. I think a safer bet would be to put the appropriate stop so that you have a point to argue.
Keeping it Simple
  • #14
  • Jul 21, 2006 8:53pm Jul 21, 2006 8:53pm
Does anyone have a list of the brokers that offer this protection??...a guarantee in the contract that you can't lose more than what's in the account.

I have no problem risking everything I deposit into my live account (of course only if I have a very long streak of bad trades), but still don't want to be with a broker that could hold me liable for a negative balance. I know I'm probably just being paranoid , but what if one day my account is hacked, computer error on their side, huge gap in the market, etc....I've got too much to lose in personal assets.

If I ever make decent gains in Forex, I also have the plan of keeping a portion of my investment capital in a separate insured account, only transferring it over to the broker if necessary. To do this I'll have to increase leverage, but my trading system will have stoploss set far away from a margin call.

So I guess in the end, I'm saying I just don't have much trust in companies and want to limit my risk in anyway possible.

Kevin
  • #15
  • Apr 12, 2022 1:14pm Apr 12, 2022 1:14pm
You are right, you can speculate on Hugh moves with high unlimited winners but you never loose more than your stake.
That's exactly what I did with straddles successfully , untill the broker cancelled my account.....
I asked another broker concerning that topic, and he told me no broker who offers negative balance protection likes such customers who trade that way, cause on the long run its a loss to the broker., and if a customer trades that way regularly, they will throw him out....
  • #16
  • Last Post: May 9, 2022 7:44pm May 9, 2022 7:44pm
How can you go negative? I thought if your free margin runs out they close your positions.
0 traders viewing now