Have you heard about negative balance protection? It’s one of the most well-known financial regulations that are in place for many years. This financial regulation acts as a guideline to ensure a better and more stable financial sector. In addition to it, it ensures that the traders are safe and protected from deceptive and fraudulent practices. Do you wish to know more about it? If yes, then please look no further as you have already landed on the right page.
WHAT IS NEGATIVE BALANCE PROTECTION?
Negative balance protection represents a situation that even under highly volatile conditions no client is responsible for paying back a negative balance. The traders can not lose more money than the trading funds they have in their accounts. Forex brokers with negative balance protection is a precautionary measure that is undertaken by the brokerage firms in order to safeguard their customers. This financial regulation has one key aim i.e. the policy protects all traders and even ensures that they will not lose more money than the actual deposit amount. For example, if your trading account incurs a loss and turns negative while performing a trading activity, then you won’t have to pay the negative balance.
Example of Negative Balance Protection:
Trader deposit: $500
Trader BUY EURUSD and enter 2 mini lots.
After the NFP report, EURUSD goes down 300 pips in a few seconds.
2 mini lots X 300 pips = 600 pips loss.
Stop-loss didn’t activate and now trader has a negative balance -$100.
Broker’s platform activates negative balance protection and now the trader has $0 in his account.
Negative balance protection has gained importance since 2011 when the Swiss-franc-crisis occurred. During the Swiss-franc-crisis, the Swiss National Bank has stopped keeping in conjunction with the value of EUR. This situation ultimately led to the sudden and rapid strengthening of the Swiss franc against EUR. Many traders were not prepared for this situation and they ultimately ended up losing more money than they originally had deposited in their respective accounts.
In such situations, the brokers used to ask the traders to deposit additional money to nullify the negative balance generated in the earlier days. But, the situation has now changed. Nowadays, it’s the broker who takes responsibility for the loss in case there is a negative balance situation.
HOW TO PROTECT YOUR ACCOUNT FROM A NEGATIVE BALANCE?
There are three standard tools that you can use to protect your account from a negative balance. These tools are easy to use and they are really helpful as they prevent you from incurring a loss.
i) Stop Loss Level: This tool is helpful when it comes to protecting your account from a negative balance. As a trader, you will need to mention the Stop Loss. It will be a reasonable way to protect your money when there are instability and volatility in the market and there are chances of rapid losses.
ii) Leverage: This is indeed an important and crucial tool that protects you from a negative balance. When there is higher effective leverage, it translates to higher potential risks and more profit.
iii) Transactions Volume: It’s another key factor that protects you from a big loss. Please bear in mind that all transactions can never be profitable. Some transactions will be unprofitable and you should be mindful and cautious about the transaction volume so that you do not incur a massive loss in such a situation.
REVEAL THE TOP TWO ADVANTAGES OF NEGATIVE BALANCE PROTECTION
i) First of all, Forex brokers with negative balance protection are not liable for any losses. This regulation provides an extra advantage to the traders. That’s because — the brokerage firms will be responsible in such situations. Your broker will be the liable party if your trading account witnesses more loss than its actual invested money.
ii) With negative balance protection enabled, your trading account will never turn into negative. Even if the traders face a bad loss, they will ultimately pay for the maximum deposited amount. There will not be a negative balance loss and it will save you from debt.
DISADVANTAGES OF NEGATIVE BALANCE PROTECTION
i) It may appear like the broker is the only responsible party in case of a negative balance loss. But, here is a problem. The brokers may attempt to close out the market before it can start favoring the traders.
ii) Those Forex brokers that have negative balance protection, they usually tend to charge an increased brokerage fee. By charging an increased brokerage fee, these Forex brokers attempt to cope up with the negative balance losses.
POLICIES THAT SUPPORT NEGATIVE BALANCE PROTECTION
i) CySEC Policy: Please note that all CySEC regulated firms enable negative balance protection. This policy is established by Cyprus Securities and Exchange Commission and it is applicable to account basis. For example, if a trader has two different leveraged-positions with a single Forex broker, then funds in position can be used to clear out the negative balance, caused by another position. However, the entire trading account will not ever get into a negative state.
ii) FCA Policy: FCA or Financial Conduct Authority policy is applicable to the UK-based brokerage firms and traders. It has set the maximum leverage values for the traders. For instance, if you are a better-experienced trader, then your leverage cap will be 1:50. For the little-experienced traders, the leverage cap is set to 1:25. This policy is applicable to all FCA regulated brokers.
Four BROKERS THAT ENSURE NEGATIVE BALANCE PROTECTION
Note, all brokerage firms do not offer the same level of negative balance protection. It varies based on the rules and regulations of that particular firm. For your reference, here’re the top three brokers that ensure you’re protected against a negative balance loss.
Hotforex broker has Negative balance protection and in their contract trader can see
nder highly volatile conditions when margin calls and stop outs do not function correctly, no client is responsible for paying back a negative balance.
The XM Group: This is a licensed, globally recognized, and well-known forex broker. It operates in many territories including Australia, Cyprus, Belize, and the United Kingdom. The platform adheres to many regulations and policies including CySEC, IFSC, ASIC, and FCA.
Fxpro broker company is regulated and It ensures all traders are offered with negative balance protection in Order Execution Policy.
Avatrade broker’s platform offers negative balance protection.They put in their contract:
In the rare scenario where a market move puts the client in a negative balance position, we will refund the difference through a “Negative Balance Adjustment”.
THE FINAL VERDICT
Negative balance protection is an important and essential precautionary measure for all traders. It protects the traders against a massive loss and bad trading moves. With this regulation applied, it’s not the trader but the brokerage firm will be the actual responsible party.
Since the Forex trading market is very unpredictable and unstable, the above regulation will protect and safeguard you.