DEFINITION of negative balance protection
Negative balance protection is a precautionary measure that brokerage firms take in order to safeguard their clients.
WHAT IT IS IN ESSENCE
This policy ensures that traders will not lose more money than deposited. In cases, their account goes into negative as a result of their trading activity.
Even if the market moves quickly or gaps, negative balance protection does not apply to professional traders.
In an increasingly volatile forex market, this is one of the most important questions traders can ask.
Referring to negative balance protection, which can prevent a trader from entering into debt.
Frankly, a negative balance is the ugly side of borrowing. It results from sudden adverse market shifts.
Whereby the market value of a customers’ assets, shrinks below the market value of his borrowing. And before a stop-loss or a close-out trade unwinds the losing trade. As a result of these adverse shocks, customers find themselves losing all of the account equity.
Moreover, owing to any shortfall between assets and liabilities before the position was stopped out.
The negative balance is an economic impossibility for the dealer. It only applies when brokers route positions to a 3rd party.
HOW TO USE
Alas, not every retail forex broker offers negative balance protection.
For the inexperienced trader, the lack of a margin call can mean the difference between losing money and going into debt.
This is a subtle but crucial difference.
In forex trading, you may tolerate losing the money you can afford to lose but going into debt is never acceptable. Regardless of how much experience you have.
It ensures that traders who possess losing positions don’t enter into a negative balance in their forex trading account
Providers of leveraged products in the ESMA (The Essential Services Maintenance) regulated region (including the UK) are required to enforce it on a per-account basis.