What is Negative Balance Protection?
In an increasingly volatile forex market, this is one of the most important questions traders can ask. Of course, we are referring to negative balance protection (also termed margin call ), which can prevent a trader from entering into debt.
Unfortunately, not every retail forex broker offers negative balance protection. For the inexperienced trader, the lack of margin call can mean the difference between losing money and going into debt. This is a subtle, yet crucial difference. In forex trading, you may be able to tolerate losing money you can afford to lose (after all, there’s no such thing as a perfect trader who wins all the time). However, going into debt is never acceptable, regardless of how much experience you have.
The benefits of negative balance protection
Negative balance protection ensures that traders who possess losing positions don’t enter into a negative balance in their forex trading account. If you find yourself in a bad trade and are losing money fast, a margin call can save you from going into debt. Simply put, a margin call automatically closes your open losing positions.
Although some brokers provide “draw down” bonuses, which allows traders to recover some of their losses, this is but a short-term remedy to a much bigger problem.
In today’s complex trading environment, negative balance protection can help traders manage volatility and take advantage of high-volume trading sessions without having to worry about going into debt. After all, most traders would agree that low volatility is a bad thing in retail forex trading because it limits opportunities for entry. However, too much of anything can be equally as bad. In the case of forex, too much volatility can wipe out your trading account in a matter of moments. This is why negative balance protection is so important.
Negative balance protection says a lot about a broker
As we mentioned at the outset, not every retail forex broker offers negative balance protection. What’s more, many brokers claim to offer negative balance protection simply to reassure newcomers that they are a trustworthy service provider. Others do it to lure newcomers because “guaranteed margin call” is a new industry buzzword, much like “ECN” and “STP” brokers.
Traders can easily tell the difference between brokers that just say they offer negative balance protection and those that actually guarantee it. For starters, how long has the broker been in operation? This will tell you a great deal about whether the broker is sufficiently well capitalized and is in good standing. If you’d like to weed out 90% of brokers, simply search for retail forex brokers that have been around for more than a decade. These guys probably offer guaranteed margin calls to save you from going into debt.
What may happen with negative balance protection
2015 was an especially volatile year for the global financial markets, including retail forex trading. The Swiss National Bank’s decision to remove the three-year old peg of the EURUSD exchange rate in January triggered unprecedented volatility in the markets, causing many brokers to go out of business, while others scrambled for bailouts. Meanwhile, traders were left in the dark as to whether their brokers would demand payment for negative balances.
The SNB blowout in January 2015 highlighted the importance of guaranteed balance protection. The last thing a trader needs is to deal with losses that exceed their investment capital, especially when you consider the composition of the retail forex market. The great thing about CFD trading is it attracts people from all walks of life, including “social” traders and other laypersons looking to make a little extra money on the side. If you’re new to trading the last thing you need is to go into debt on a few bad trades as you’re starting out.
At easyMarkets we understand that the onus of researching and picking trades is on the trader, but the onus of facilitating trades in a variety of market conditions is on us, the broker. That’s why we offer guaranteed negative balance protection.
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