Learn everything you need to know about forex negative balance protection here, from the story behind the feature, why it is important, and how to look for the brokers.

Negative Balance Protection

Staying safe on the forex market should be a top priority for all traders. The market is constantly moving and there is simply no way to accurately predict bad circumstances which might occur from time to time.

When a huge problem of that kind appears, traders are always the ones who must pick up the pieces and get themselves together. For some of them, it might also mean an end to their trading career.

In order to prevent this, you need to take certain steps to keep your funds safe. First and foremost, you should choose a brokerage firm with negative balance protection as an option. It basically works like a reset feature whenever your account balance dips below zero due to extreme volatility in the market. But, what does it really mean for traders? Why is this important?

 

The Story Behind Negative Balance Protection

After the event that occurred in January 2015 with the Swiss National Bank and Euro, a large number of forex traders ended up in a terrible situation. Those who were using high leverages found themselves in a negative zone and they actually owed enormous sums of money to their brokers.

But, traders who experienced negative balance were "pardoned" and their debt was forgotten. Later, this kind of measure is formalized as "negative balance protection".

This made everyone take a closer look at who they are trading with and examine the terms of their brokers. Suddenly, brokers with a clause to protect their clients' negative balance has become a hot commodity. That's why some brokerage firms started promoting themselves with negative balance protection.

 

How Negative Balance Protection Works

So, negative balance protection is an effort to put a stop to your account going into a negative balance. Forex brokers with negative balance protection usually have enough capital in their account to "pardon" their clients' negative balances, thus resetting them to zero.

There are different ways in which this feature is applied in brokers. Some brokers may activate negative balance protection automatically, some may implement it only after the market condition is settled. Hence, you may need to ask your broker's customer support or carefully read the terms for negative balance protection to comprehend how it works.

Nonetheless, negative balance protection is not something that can be ordered manually by traders. In fact, you would not even feel the benefit of this feature unless the market is in great turmoil and the broker's Stop Out fails to close losing trades

 

How to Look for Brokers with Negative Balance Protection?

Forex is a volatile market and sometimes things happen out of the blue. Forex brokers with negative balance protection is one of the safety precautions and it also shows that your broker cares for both your funds and you.

Of course, not all brokerage firms have that option. That's why you are highly recommended to make sure of the negative balance protection. You can search on the broker's official website as many of them would proudly inform their traders that they can provide negative balance protection. Otherwise, you may ask their support regarding this matter.

The following list is a great example of brokers who explicitly state their commitment in providing their clients with negative balance protection:

 

Pros and Cons of Negative Balance Protection

Despite the great advantage that negative balance protection can provide for traders' safety, there are some pros and cons to consider.

Pros

  • Protecting traders from negative balance during extreme volatility
  • A good indicator to measure brokers' commitment in safety and security.
  • A strong backup plan in case of Stop Loss, Margin Call, and Stop Out failures.
  • Keep traders from having a debt to brokers.

Cons

  • Not available in all brokers
  • Different regulations, different standard
  • Some brokers tend to apply certain terms and conditions that need to be studied carefully

 

Apart from negative balance protection, another safety feature provided by forex brokers is segregated accounts. Check out what it's all about in What is a Segregated Account in Forex Brokers?