Negative balance in forex trading account could actually happen. Hence the questions, how retail forex traders can avoid negative balance? Do we really have to pay back what we owe forex brokers in the event of negative balance?
Many traders wonder, can a forex trading account turn negative? Leverage trading opens the possibility for negative balance to occur because traders could owe more than the amount of funds that are available in his balances. Seen from this perspective, worries over negative balance in forex account make sense.
What's more, as shown by what happened on Black Thursday (January 15th, 2015), negative balance in forex could actually happen. Hence the questions, how retail forex traders can avoid negative balance? Do we really have to pay back what we owe forex brokers in the event of negative balance?
How Negative Balance in Forex Trading Happens
Negative balance in forex trading account could happen if there are no brakes to stop excessive losses. Those brakes could be Margin Call (MC) or Stop Loss (SL) setups.
Some brokers enacted Margin Call limit where floating positions will be stopped automatically at a loss when the figures of probable losses touched the limit. Because of the possibility of losing one's account due to MC, the limit often avoided by forex traders. Though actually, Margin Call in account setting can prevent your account balance to be wiped out in an instant and or coming to negative territory. The same goes for Stop Loss that often being ignored by traders, although it supports their risk management.
By applying Margin Call and Stop Loss levels, traders can avoid negative balance in forex trading.
However, there are instances when SL, Margin Call, or the likes, did not work; as happened in the aforementioned Black Thursday. The sudden removal of CHF's Euro peg by the SNB hit the forex industry with extreme market volatility that had resulted in hundred millions dollars of losses and the closure of a number forex brokers. It is very rare, but there are possibilities for such thing to happen following the release of surprisingly influential news.
EUR/CHF dropped more than 40% in just a few minutes after SNB's announcement, and that caused trading platforms in major banks to froze. Consequently, there is a huge gap between where the price was before the crash and where it is after the crash. Because during crashes, the platform froze, so MC and SL were useless to stop excessive losses.
Deutsche Banks' Autobahn system, for instance, was shut down for some time. Many brokers drew quotes from major banks like this, and as a result, stop loss became dysfunctional and profit targets broke down due to the price gaps between quotes. In addition, liquidity from major banks wass reported to be practically nonexistent, which made any steps to counter losses became impossible.
The use of leverage also contributed heavily to the post-SNB turmoil. When brokers lent funds to traders, traders simply have to provide a small amount of money in order to trade with bigger size of positions. In incidents like this when many traders suffered losses, traders only have to bear a small amount of it, while the brokers have to bear a much bigger burden, particularly when hedging failed as well.
The result was numerous complaints of deficits both in trader and broker accounts. Excel Markets (New Zealand), Global Brokers NZ (affiliated with Excel Markets), Alpari UK, Liquid Markets (UK), and Boston Prime (UK) are among the forex brokers ended up in bankruptcy.
In global technical failure like this, it is up to each broker whether they are going to respect clients' SLs and erase negative balances or not.
A Question of Protection
As seen from the Black Thursday as well, most global forex brokers chose to forgive negative balance. The move was good for forex traders, but why did they do that? There are two reasons:
1. Negative Balance Protection
Several forex brokers' terms and conditions include a clause about Negative Balance Protection. The article refers to the broker's commitment to prevent negative balance from occurring by implementing a certain Margin Call level, or broker's commitment to pardon negative balance in forex trading account. If you are looking for a new forex broker, then it is a good idea to choose a broker with this kind of commitment.
The examples of forex brokers offering Negative Balance Protection can be found here:
2. Preventing Client's Migration To Other Broker
Global forex broker market share spanned all over the world. Hence, it limits their ability in collecting client's debts while the broker itself and their client reside in different jurisdictions. In situations when a broker insists on it, the client could simply shrug it off and go on to other brokers. In order to prevent such things, even forex brokers who do not have Negative Balance Protection clause often decided to end negative balance peacefully by giving up on it. In this case, Dukascopy and OANDA are two of the most prominent examples.
Founded in 2004, Geneva-based Dukascopy Bank offers trading spots, including forex, metals, binary options, CFDs on bonds, commodities, indices, stocks, ETFs, and cryptocurrencies through the same platforms. After the development of the Swiss FX Marketplace, Dukascopy acquired a Swiss banking license in 2010 and launched Dukascopy Bank.
They try to provide trading services based on the following main principles: equal trading rights and a transparent pricing environment. Dukascopy is licensed in Switzerland through the Swiss Financial Market Supervisory Authority (FINMA) and in the EU through the Financial and Capital Market Commission of Latvia (FCMC).
This ECN-Marketplace represents the advanced generation of liquidity aggregators in the industry. Dukascopy has a unique technology to hedge instantly any clients' trades directly with other liquidity providers. The company is currently connected to Bank of America, Commerzbank, Nomura, Barclays, Currenex, Deutsche Bank, JP Morgan, and other liquidity providers.
All trades are usually executed in milliseconds. Dukascopy offers the deepest source of liquidity in the industry resulting in tight spreads.
Opening an account in Dukascopy would allow you to trade in its proprietary platform called JForex, which can be accessed by desktop and mobile. In desktop experience, traders can get several features including hundreds of indicators, advanced charting, historical testing, real-time news, and embedded customer support.
On the other hand, customization is weak as there are no pop-out charts or built-in complex desktops and watchlists. The web version of the Java-based software triggers security warnings in Chrome and other browsers, while JForex mobile versions allow easy syncing between platforms.
Not only JForex, trading in Dukascopy also offers access to MetaTrader 4 platform that is appreciated by many traders around the world. It has main features such as expert advisors and customizable templates.
Furthermore, Dukascopy provides two types of accounts including Mobile Current Account (MCA) and Standard Current Account (SCA). For private use, traders can choose both account types. But for business use, SCA is more suitable. The minimum acceptable order size is 1,000 units of the primary currency.
Depending on Dukascopy services used by the clients, commissions may apply. Commissions and spreads are calculated through a declining tier system, with clients categorized by monthly trading volume and net deposit.
Dukascopy has won several awards including Best Forex Trading Apps 2019, Best Platform & Tools 2018, and Best Mobile Trading. Besides, the company also gets awarded as Best Forex Bank 2018 by China (Shenzhen) Forex Expo, Best Forex ECN/STP Broker 2018 by London Forex Show, and Best Provider of Liquidity 2017 by IAFT Awards.
Traders will get multiple ways of funding account, including credit and debit cards, wire transfers, and bank transfers. Each client is protected up to CHF100,000 against the insolvency risk of Dukascopy Bank. However, Dukascopy charges a $20 fee in addition to possible bank or credit card charges for withdrawals.
Dukascopy's clients have the opportunity to get more profit through bonus programs, including Equity Bonus, Discount Program, Experience Sharing, and Anniversary Bonus.
The minimal deposit size of the account with Dukascopy Europe is $100, while the minimum for Dukascopy Bank SA is $1,000. Deposits accepted in 23 currencies. Several additional features are available depending on the clients' profile and the type of account.
Dukascopy Bank provides a wide range of free financial information and other attractive resources through its website, Dukascopy TV online television, Freeserv products, and its active online Dukascopy community that hosts over 130,000 members. Based on the review of their clients, product sections and trading platforms point to limited "how-to" articles and videos about forex, CFD, indices, and cryptocurrency trading venues.
The members of Dukascopy may exchange in several languages on trading experiences, market views, trading strategies, may win prizes in various contests, and freely communicate through advanced and secure chat and video conference systems developed by Dukascopy.
The company provides a 24/6 support team through phone and live chat. Traders also can send questions via email. They maintain active social media portals as well as a dedicated support forum for JForex and automated trading.
Overall, Dukascopy is suitable for the highly experienced and high-volume traders. Higher than average trading costs could undermine beginner and retail accounts, who may have to look elsewhere for building skill levels due to weak educational resources.
Traders looking for brokers with accurate precision, OANDA can be an option. That is because OANDA is a broker that provides quotes with 5-digit accuracy and active price movements that follow market developments. Order execution speed is also faster in this broker.
It provides benefits for novice traders, as they can trade with smaller volumes using the calculation system based on currency value, unlike other brokers adopting the lot system.
Founded in 1996, OANDA was built by Dr. Michael Stumm who is a lecturer in Computer Engineering at the University of Toronto, Canada, along with his colleague, Dr. Richard Olsen of The Olsen Ltd., which is one of the leading econometric research institutes. They have a head office in San Francisco, United States.
OANDA branch offices can be found everywhere. Some of these offices are located in the United Kingdom, Singapore, Japan, and Canada. With this number of offices spread, OANDA has increasingly attracted the attention of clients worldwide.
OANDA's company is registered under several well-known jurisdictions in financial trading. They are regulated by CFTC and NFA in the US, FCA in the UK, ASIC in Australia, and many others. Traders do not need to worry anymore about security when trading in OANDA. However, these advantages make trading rules at OANDA more stringent compared to other brokers.
For example, OANDA only allows maximum leverage of 1:20, because the rules in the US and Japan do not allow leverage above that. Besides, the registration procedure is more complex due to various additional requirements that are not submitted by other forex brokers. On top of that, hedging is not allowed in one trading account as the client must open an additional account to hedge.
Nevertheless, OANDA is known for being a leading broker with many advantages offered. OANDA faces increased market risk during periods of price volatility, such as economic and political news announcements. When market spreads increase or decrease, their pricing engine widens or narrows spreads accordingly. That way, traders can get the latest conditions from price movements in the market more quickly.
Prices move very fast in the market. Especially when news releases have a large impact on market volatility. This condition is often exploited by brokers to take advantage of clients with Requotes. However, traders do not need to worry about additional costs when trading with OANDA.
The company never withdraws Requotes so traders can get maximum profit. When traders are unavailable to monitor open positions, they can set take profit orders to lock in profits and Stop Loss orders to help protect against further losses.
As an experienced and well-known online forex broker, OANDA is committed to maintain an efficient trading environment that reduces latency and provid tools to help clients manage the degree of acceptable slippage.
With a fast & reliable trading platform by OANDA, clients' trades are executed in 0.012 seconds. This suits traders who choose brokers based on execution speed.
Because of this exceptional execution service, it is not surprising that OANDA won many awards, including the winner of the world's Best Retail FX Platform at the prestigious e-FX awards. The broker is also voted number 1 for Consistency of filling trades at quoted prices, Execution speed, and Reliability of platforms.
There is no minimum deposit or minimum balance required to open an OANDA account. Deposit and withdrawal can be done easily. OANDA provides a variety of payment method facilities, including Paypal, Wire Transfer, Credit Card, and Debit. Traders can adjust it to the region where they live.
OANDA provides more than 100 trading instruments, including 71 currency pairs, 16 indices, 8 commodities (Brent Crude Oil, Copper, Corn, Natural Gas, Soybeans, Sugar, etc.), 6 Bonds, and 23 Metals.
The fxTrade and MetaTrader platform are available at OANDA. These platforms can be used for Desktop and Mobile. Another plus is they have an OANDA Technical Analysis that exists in collaboration with a technical analysis provider called Autochartist.
With these platforms, clients can monitor price movements easier and automatically recognize patterns created on charts, as well as receive alerts when the awaited patterns appear. Access to this technology can be enjoyed free of charge.
In conclusion, OANDA is an ideal broker for traders in need of fast execution backed by many years of experience. The company is also a good alternative for those looking for a well-regulated broker with flexible trading and deposit conditions.
The two reasons above have made negative balance in forex trading a relatively minor risk that rarely occurs. Brokers usually decide to simply turn negative balance to zero rather than demanding payment. That way, clients will be relieved and free to deposit their funds and trade forex again.
Up To Your Broker
However, there are times when your broker might demand clients to be responsible and pay back what is owed as reflected in their account's negative balance. Forex.com and FXCM were each reported to send notices for clients to 'fulfill their responsibilities' in reverting the negative balance in forex trading account.
FOREX, also known as FOREX.com, is one of the global market leaders in the financial industry. Established in 2001, FOREX is a part of Gain Capital Holdings specifically meant for FX & CFD trading on powerful trading platforms and the popular MetaTrader 4.
Similar to its parent company, FOREX has been licensed by various financial watchdogs, including the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) from the US, the Financial Conduct Authority (FCA) from the UK, the Investment Industry Regulatory Organisation from Canada, as well as the Financial Services Agency from Japan.
For traders in South East Asia and the Middle East area, FOREX has been operating under the regulation of the Cayman Islands Monetary Authority.
Quality execution on every trade, transparency, and competitive pricing are some of the most optimized services in FOREX.com. As per Q3 2019, the broker's total assets reached $1.288 billion and the total customer equity amounted up to $849.8 million.
FOREX presents its clients with the best freedom to trade in 300+ global markets including 80+ FX pairs, 220+ shares, indices, commodities, and cryptocurrencies. Spreads on each asset are displayed live on FOREX.com's official website, with EUR/USD having a spread as low as 0.8 pips.
For the trading platform, FOREX provides two major options: its in-house platform and MetaTrader 4. Both types are available on various devices and can be accessed as a web-based platform and mobile app. Furthermore, FOREX's proprietary platform is furnished with advanced charting tools like 70+ technical indicators, a host of time intervals, multiple chart types, 50+ drawing tools, and customization features.
Trading in FOREX.com is provided with various trading conditions that accommodate the needs of multiple types of traders. Apart from the services, FOREX also provides guidance and supports in the forms of real-time trade signals and analysis tools from Autochartist and Recognia. There are also trained market strategists to work with on developing a trading plan, as well as market analysis to keep clients Stay informed with real-time market insights and actionable trade ideas from FOREX's research team.
Account funding and withdrawal are enabled via bank transfer. However, there are no further details on the minimum amount of each process. FOREX also does not seem to present other options for payment methods like credit cards or even e-payment.
Generally, FOREX is a reliable FX and CFD broker based on its regulations and long-standing history since 2001. Clients can trade in either FOREX's platform or MetaTrader 4 with competitive spread and pricing. Still, FOREX is one of the top-tiers in the brokerage industry that adheres to strict regulations of prestigious financial regulators.
Some of its trading conditions may not suitable for retail traders with barely enough experience or small capitals. Despite it all, FOREX.com hosts one of the most accomplished material packages when it comes to financial trading.
FXCM (Forex Capital Markets) is a brand name of a retail broker for trading on the financial market, especially the foreign exchange market. The broker was founded in 1999 and was originally headquartered in the United States. After a series of lawsuits from customers and case settlements by the US regulator (CFTC), FXCM moved from the US and became a UK-based broker, authorized and regulated by the Financial Conduct Authority (registration number 217689).
Trading with FXCM is supported by enhanced execution with the Liquidity providers' stream pricing through the FastMatch Electronic Communication Network.
FXCM works with several global banks, financial institutions, and other market makers as their Liquidity providers including Barclays Bank, Citadel Securities, Citibank, Deutsche Bank, FASTMATCH, XTX Markets Limited, UBS, Morgan Stanley, Commerzbank, and Jefferies Financial Services.
This, in turn, enables FXCM to present its clients with fast trade execution, competitive spreads, low negative slippage, no re-quotes, no stop/limit restrictions, and up to 89% of orders are executed at the requested price or better.
For the trading platform, FXCM is remarkably known for its proprietary product called Trading Station. The latest version of this platform's web display is claimed to be built in Mac Friendly HTML5. It features a range of trading appliances such as integrated news, economic calendar, FXCM's top trading tools, social trading functionalities through FXCM Cloud, customized trading analytics, automated strategies, and advanced charting for better analysis. For flexible traders who prefer trading on-the-go, FXCM has also provided Trading Station in mobile version, both for iOS and Android users.
However, the company's in-house platform is not the only option presented for clients. FXCM also gives the choice to use MetaTrader 4 for clients who are more familiar with MetaQuote's product. Also, ZuluTrade access is enabled for clients with keen interests in copy trading schemes that transcend across brokers.
Instead of classifying account types based on minimum deposits, FXCM chooses to offer trading accounts based on the instruments traded. For FX traders, this broker provides Active Trader and Institutional accounts.
Active Trader is the ultimate account type for retail traders with two-tier pricing. Tier 1 applies a minimum deposit of $25,000 with a $30 commission for 1 million volumes traded, while Tier 2 has no detail on deposit requirement but gives better fee conditions. Spreads in both tiers start from 0.2 pips.
Institutional account, also known as FXCM Pro, is marketed as a wholesale execution and liquidity solution for retail brokers, hedge funds, and emerging market banks. The account presents trading spreads from 0.1 pips and other competitive benefits like API solutions as well as prime brokerage services.
For non-FX traders, FXCM provides a CFD trading account with low spread costs from 0.37 pips (in XAU/USD) and a wide range of class assets from precious metals, soft commodities, and indices.
Last but not least, a collection of in-depth articles is provided to help traders' knowledge and insights on the forex market. Trading tools like FXCM Plus, Market Scanner, Trading Signals, and Technical Levels are also developed to support traders who open accounts in FXCM.
In conclusion, FXCM is an experienced retail broker with a lot of "ammunition" to help traders with its best version of execution, pricing, and tools. It is a well-regulated broker backed with a long history in the financial market, even though it has a dark history in the United States' brokerage industry.
Still, the relatively high standard on minimum deposit ($25,000) puts FXCM as a broker suitable for experienced traders with good money management. It is not recommended for new traders with limited capital.
It could be because the regulation abided by the broker itself forbid liquidation of negative balance in forex trading, or because the broker suffered financial troubles as well. In these circumstances, what could a forex trader do?
- If your broker has clearly stated clauses about Negative Balance Protection, then clients have the right to refuse to pay back by quoting the clause. But commonly, such brokers will automatically turn negative balances into zero some times afterward, or after clients send special requests.
- If your broker has not promised Negative Balance Protection but located in different countries with the client, then the client could be free to ignore their demands. As clients that reside in different jurisdictions with their broker will find it difficult to sue naughty brokers, brokers that reside in different jurisdictions with their clients will find it difficult to sue their clients for negative balances too. The clients certainly will not be able to trade with the broker, but he could still trade with another.
- If a broker has not promised Negative Balance Protection and located in the same jurisdiction with their client, then the broker could sue the client all the way to the court. If it happens, then of course the client has to follow the law and might have to fulfill his liabilities in the end.
In the end, all of these will be determined by your own broker. Just talk about it with them; can your account suffer negative balance or not, and what will they do if such things happen. Each broker's policies are different, but a bonafide forex broker will state its stances on the possibility of negative balance in forex trading account without many asterisks.
To understand the mechanism behind the negative balance protection, see an interesting insight into how negative balance protection works in forex brokers.