Negative Balance Protection

Negative balance protection means that a trader cannot lose more money than what is currently in their trading account. That is, their account will not go into a negative balance.

You may ask, ‘how is that even possible?‘. The answer is; it is entirely possible due to marketing gapping and the slippage that may occur on a trade.

How Does It Work?

GraphicsNegative balance protection acts as a protective mechanism in the event that the financial markets move rapidly against your trade/s.

It ensures that traders with losing positions do not end up with a negative balance in their online trading account.

Negative balance protection is particularly important for new traders. This is because they may be unaware of how fast-moving markets can result in price slippage.

Brokers That Offer Negative Balance Protection:

Broker     Official Site   Max. Leverage Regulations Min. Deposit    Spreads From Review
See Deal
200:1 $0 0.14 (Fixed)
Review
See Deal
500:1     $200 From 0.1 pips
Review
See Deal
400:1 $100 From 0.9 pips
Review
See Deal
400:1   $100 From 0.5 pips
Review

Negative Balance Protection Example

  • Say you deposit $1,000 into your trading account with broker XYZ.
  • You buy 5 units of the Wall St 30 index utilising leverage of 200:1. With the index currently sitting at 35,000 points, that trade requires $875 in required margin (35,000 x 0.5% x 5 units).
  • The trade is opened and the market rises 20 points, meaning you are in profit $100 (20pts x 5 units).
  • However, 20min later some very poor economic data is released from the US and the local sharemarket/s drop in value.
  • Wall St 30 index is heavily affected by this negative data and drops 250 points in just a few seconds.
  • The next available price is 34,770 and your trade is closed at that price due to insufficient margin.
  • Your account would read (minus) – $150!

How can I owe the broker $150 when I only had $1k in my account’?

The answer is, you WILL owe the broker $150 if they DO NOT offer negative balance protection.

In the example above, the price initially increased by 20pts to 35,020 and you were in $100 of profit. Then volatility hit due to a news announcement and 250pts was wiped off the index within seconds.

In this instance, the first price that your broker was able to offer you was 34,770. This was 230pts away from where you originally opened the trade (35,000) and 230pts x 5 units = a loss of $1,150.

If you deduct the $1,150 loss from your initial $1k investment, you end up with a negative balance of minus $150. You now owe the broker $150.

However, if you were trading with a broker that offered negative balance protection, your loss would not have exceeded the deposited $1,000 amount.

Why Is Negative Balance Protection Important?

It is there to help protect you and we urge all traders to trade with a broker that offers it. You will find that most tier-one regulated brokers do offer negative balance protection, although you should always confirm first.

Remember, it does not cost you anything to gain access to a broker that offers negative balance protection. It is free! So why wouldn’t you use a broker that offers it? It is an added protective mechanism – so take advantage of it!