Negative balance protection simply means that if markets quickly change and go against your current trades, your account will not go into negative balance. In a way this is a safeguard provided by brokers to guarantee their traders, that no matter what they will never lose more money than their initial investment. Negative balance protection makes sure that a trader with a losing position doesn’t result in a negative balance.
It is a really important factor for new traders as they may not know how quickly the markets can change due to high volatility. This balance safeguard, in combination with other tools to manage risks, allows traders to have increased control of how much risk they have while trading the financial markets.
Negative Balance Forex Brokers List
MAS, JFSA, DIFC
What can happen when negative balance protection is not provided?
In 2015, the decision by the Swiss National Bank to remove a peg of the EUR/USD exchange rate that had stood for three years triggered volatility that was unprecedented in the markets. This caused lots of brokers to go bust while other brokers looked for bailouts. Traders did not really know whether the brokers would want payment for their negative balances.
This collapse highlighted just how important it is to have negative balance protection. The last thing you want as a trader is to have to consolidate the losses that have gone over their initial capital.
Is Negative Balance Protection compulsory?
Offering negative balance protection is not compulsory for Forex brokers. A lot of brokers claim that they offer negative balance protection just to reassure their clients that the can be trusted with their money. Some do it just to lure in the new traders. In order to distinguish the legitimate brokers that offer such protection, you should look at how long the broker has been in business. If they are new to the scene, they may not be all the trustworthy. To weed out the good ones, have a search for those brokers that have been around for over ten years.
When all is said and done, if you want to guarantee protection from negative balances, choose a reputable Forex broker. It would be sensible to choose a broker that has been around for a long time. These brokers are the ones that have stood the test of time and survived all of the economic crises.