Thanks to margin, today online forex trading is available to any investor. Margin allows a trader to control 100 – 500 times more the amount of money actually deposited. When there is a chance of profit, there is also a possibility of loss. By borrowing sums that a trader doesn’t actually possess, is it possible to lose more money than invested? Is there a possibility of negative balance? Can you end up owing a large sum of money to the forex broker? And if so, how can you protect yourself from it?
Do You Borrow Money from Forex Broker?
First of all, let’s understand what margin actually is. In forex currencies are sold in lots or in other words – $100,000. When trading with margin account, the term “leverage” joins the game. Leverage displays the money “borrowed” from a broker. Leverage varies from 1:50 to 1:500, depending on a broker and the size of a trading position. For example, you have opened a 1% margin account and deposited $1,000. Leverage 1:100 allows you to control $100,000 instead of just $1,000.
Unless you buy Forex through a margin account or leverage, you cannot lose more than you invest. If you buy on margin or with leverage and your investment has a significant decline in its value, you will have to pay back the money you borrowed, which means you lose more than you invested.
What is The Risk?
Now, what is the risk of margin trading? Once you use margin account, your get a significant financial boost and a greater chance of potential profit. However, it is very easy to completely wipe all of your account out within seconds. When you have 1% margin account and there is a slight currency move, even a single penny will cost you $1,000!
With that being said, margin accounts give a forex trader a chance to dramatically increase the profits, and at the same time there is an increased risk involved in every trading decision. It is possible to lose more money than invested.
And here is another frequently ignored risk – forex brokers can close the trading position when the price reaches the point where losses are almost equal to the value of your margin account. In this situation, you can not only lose the entire account balance but also lose any change to make a profit in case the price suddenly changes the direction and moves up again.
Can You Lose More Money than You Have Deposited?
The basic rule of thumb is never trade the amount you cannot afford to lose. The last thing you need is to get the savings, the car and your house confiscated!
To avoid any trouble related to margin trading, always read your forex broker terms and conditions before agreeing to them. Some brokers do not hold you responsible for a negative balance caused by trading activity where loss is greater than the deposited amount, meaning that the worst case scenario is when you lose the entire deposited sum.
However, there are forex brokers that hold you responsible for the negative balance and will require you to deposit more money to cover it. In case you agree to such contract, you can not only lose all of the money in your account, but also end up owning money much greater than your initial deposit.
When You Can’t Lose More Than You Invest Trading Forex?
If you are investing in Forex with cash, meaning you are not borrowing money to invest, your maximum loss is the amount that you invest.
For example, say you invest one hundred dollars in Forex. The lowest value that your investment can decrease to is zero since the value of any currency cannot be negative. So, worst case, you lose all one hundred dollars that you invested.
Even though you can lose your entire investment, it does not mean that you necessarily will. That is just the maximum that you can lose. You may only lose part of what you invested.
On the other hand, sometimes, you will have to pay fees on your investments through your brokerage account.
If you are paying fees, these can add to the amount of money you lose on your investment. But, you are still not losing more money than you invested. In other words, you will not have to pay any extra money than what you already invested before the Forex lost value.
Review Ways to Protect Yourself
1. Margin Call
Luckily for all of us, most forex brokers offer a negative balance protection called Margin Call, and will automatically close a trade before the loss becomes more than the initial deposited balance.
2. Stop Loss Order
Stop Loss Order will automatically close your trading position the moment the price reaches the point you have set. This is a great way to limit the potential loss and still stay in the game to make profits.
3. Understand Leverage
Just because your forex broker gives 500:1 leverage option, doesn’t mean you should go for it. Leverage not only increases your potential losses, but also increases the transaction costs as a % to your trading account. If you are a beginner in forex trading, while gaining an experience, use small leverage (like 50:1). This will increase your potential profits and protect you from completely wiping your account clean.
Is forex trading profitable?
The short answer is yes, Forex trading is profitable. The slightly longer answer is yes, trading in the Forex market is profitable but chances are you won’t make any money.
Can you make money on forex?
Forex trading may make you rich if you are a hedge fund with deep pockets or an unusually skilled currency trader. But for the average retail trader, rather than being an easy road to riches, forex trading can be a rocky highway to enormous losses and potential penury.
How to trade forex for beginners?
Beginners can get started with a micro account for as little as $50. Before you start jumping in you should familiarize themselves with the market and terminology of the forex market, and if you’ve already been trading stocks online it should be easy to get started.
How long can you leave a forex trade open?
For a trade based on H1 time frame: Hold the position from an hour to a whole day. H4 time frame: From four hours to a few days. D1 time frame: From one day to several days. W1 time frame: From one week to several weeks.
Can you lose more than you deposit in forex?
It’s the same as with equities. If you‘re just buying foreign currencies to hold, you can‘t lose more than you invest. But if you‘re buying derivatives (e.g. forward contracts or spread bets), or borrowing to buy on margin, you can certainly lose more than you invest.
Can you lose all your money in Forex?
A commonly known fact is that a significant amount of forex traders fail. Various websites and blogs even go as far as to say that 70%, 80%, and even more than 90% of forex traders lose money and end up quitting.
Who is the richest forex trader in the world?
Paul Tudor Jones
Easily one of the best forex traders ever is Paul Tudor Jones, who also shorted the October 1987 market crash. He is one of the richest day traders alive today, with a net worth at $4.5 billion as of 2018. Born in 1954, Jones earned a degree in Economics from the University of Virginia, in 1976.
Can you go into debt with forex?
But yes, you can go into debt trading forex on a margin account.