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Negative balance

It is important for a Forex trader to understand the concept of negative balance protection (NBP). But to understand it, one needs first to know what a negative balance is. As it can be guessed from the name, a negative balance means that funds in your Forex broker account fall below zero. In other words, you owe the broker money. Let's look at an example. You have $1, in your account and open a position with leverage. Then the market falls 15%, meaning that you lose $1, So not only you have lost all your money but you also now owe the broker $

There are various ways to avoid a negative balance. Brokers can initiate a margin call, requesting a trader to deposit more funds to his account in order to avoid a negative balance. One of the best ways for a Forex trader to avoid significant losses, including those that would put his account balance into negative, is to employ stop-losses. Yet there are times when even those measures are insufficient. One of the most prominent examples of such an occurrence was the removal of the EUR/CHF peg by the Swiss National Bank. The currency pair dropped by more than 40% in mere minutes, making trading platforms of large banks freeze. As many retail brokers rely on quotes from big banks for trading, that resulted in a big gap between prices before the crash and after. And as many trading platforms were frozen, margin calls and stop-losses simply failed to initiate. That led to big losses for either traders or brokers. As a result, many traders found themselves in debt, while several Forex brokers announced bankruptcy.

Negative balance protection

To avoid putting traders in debt, some brokers offer negative balance protection. As one can guess from the name, it prevents the balance from falling into negative territory. In the previous example, a loss of $1, will wipe out $1, from your account but it will not result in debt if the account is protected by the NBP. The advantage of such protection for retail traders is obvious: they should not worry about getting into debt regardless of how big swings on the market are.

Yet there are also drawbacks of such protection, primarily for retail brokers. Being considered professional clients by liquidity providers, brokers do not have a benefit of NBP offered to retail clients. And that can seriously hurt retail Forex brokers. For example, if two traders with a $1, account each open a position in EUR/USD, one short and another one long. The pair moves up, resulting in a $5, gain for the first trader and a $5, loss for another. Usually, those trades will cancel each other for a broker. But with NBP, the unfortunate trader will lose $1, from his account but the rest of $4, is now a liability for the broker. To mitigate such risks, brokers may increase their fees, meaning that their clients essentially pay for negative balance protection.

The big swings of EUR/CHF after the pegging and then unpegging the Swiss franc to the euro by the Swiss National Bank led to worries about risks that market volatility poses to traders. That prompted regulators in some countries to require NBP for retail clients from Forex brokers. Let's look at what regulators have such a requirement and how it works.

Countries and regulators offering negative balance protection

European Union — European Securities and Markets Authority

The European Securities and Markets Authority (ESMA) is a regulator that oversees markets in the European Union. In March , it announced a range of measures intended to protect investors, including several restrictions on contracts for difference (CFDs). Among such restrictions was per-account negative balance protection. The ESMA specifically mentioned the surge of the Swiss franc in after the SNB pegged the franc to the euro as an example of why NBP is necessary. The restrictions came into effect in August The regulation restricts the maximum loss resulted from trading CFDs to the total amount of funds related to trading CFDs on the investor's account. The regulation applies to anyone who distributes, markets or sells CFDs, including investment firms and banks. That affects retail Forex brokers as well because CFDs include rolling spot Forex. As for what countries the regulation affects, all 27 countries in the European Economic Area as well as Iceland, Liechtenstein, and Norway are subject to the ESMA regulation.

Cyprus — Cyprus Securities and Exchange Commission

The Cyprus Securities and Exchange Commission (CySEC) is a regulator that supervises the investment services market, securities transactions, and the investment and the asset management sector in the Republic of Cyprus. It was ahead of the curve compared with the ESMA and other regulators, introducing negative balance protection as early as November It clarified further in September that the protection is on a per-account basis. Being part of the European Union, Cyprus applied the ESMA regulations considering retail investor protection, including rules for NBP, when they came into effect. In September , the CySEC issued a separate regulation that made the ESMA restrictions on CFD trading permanent.

Malta — Malta Financial Services Authority

The Malta Financial Services Authority (MFSA) is the single regulator of financial services in Malta. It implemented permanent restrictions on CFD trading similar to those of the ESMA, including negative balance protection, in August

United Kingdom — Financial Conduct Authority

The Financial Conduct Authority (FCA) — regulates financial services firms and financial markets in the United Kingdom. In July , the FCA announced measures intended to protect retail investors. Among the announced measures was negative balance protection. The announced restrictions on CFDs (including rolling spot Forex) and CFD-like options are very similar to that of the ESMA, which is not surprising considering that the UK was still in the EU back then. The regulation applies to all MiFID investment firms, which distribute, market, or sell CFDs and CFD-like options. Under the regulation, a trader cannot lose more funds than he has in his or her account. The regulator further specified that the funds in the account mean funds specifically dedicated to the restricted speculative investments. That includes cash in the account and any unrealized net profits from open positions but does not include funds and other assets in the trader's account that are not dedicated to trading in the restricted speculative investments.

Australia — Australian Securities & Investments Commission

The Australian Securities & Investments Commission (ASIC) — is Australia's regulator that oversees, among other things, financial services and markets. It took longer than other regulators for the ASIC to start demanding negative balance protection but, ultimately, the market volatility during made the ASIC implement protective measures similar to other regulators. Starting March , a range of measures intended for retail investors' protection came into effect. Among them was NBP. The restrictions applied to any Australian firm or a firm operating in Australia that deals with CFDs. That includes all regulated Forex brokers. Under the regulation, the trader's liability cannot exceed the total amount of money and property held in the trader's account in relation to the CFD trading account.

Countries and regulators prohibiting negative balance protection

United States of America — Commodity Futures Trading Commission

The Commodity Futures Trading Commission (CFTC) regulates the US derivatives market. Unlike the previously discussed regulators, it does not require negative balance protection from Forex brokers. In fact, the opposite is true: it prohibits such protection outright. Under the CFTC regulation , no retail foreign exchange dealer, futures commission merchant, or introducing broker is allowed to protect retail Forex traders against loss, including guaranteeing against, limiting, assuming, or sharing trader's loss. The CFTC states that in case the loss exceeds the initial margin deposit the trader is responsible for covering the loss with additional funds. The CFTC filed its first enforcement action against a registered retail foreign exchange dealer for a violation of the regulation in August

Japan — Financial Services Agency

The Financial Services Agency (FSA) regulates the financial system, financial institutions, and securities transactions in Japan. Just like the CFTC, it forbids retail Forex brokers to offer negative balance protection to their clients. It is often criticized for such a stance as it can lead to significant losses for retail traders. For example, the flash crash of the Japanese yen currency pairs on the first trading day of led to huge losses for traders. But brokers suffered as well because many of them were unable to procure additional funds from their clients to cover the negative balance in their accounts. As a result, the total losses suffered by Japanese STP brokers totaled about $ million.

Brokers with negative balance protection

Negative balance protection has obvious benefits to Forex traders, especially inexperienced ones, though any type of trader would be happy to be protected from extraordinary situations, in which usual methods of risk mitigation might not work. Yet as was discussed previously, brokers offering protection for their clients' funds may require higher fees to offset the risk they take offering NBP.

Needless to say, brokers registered with regulators, which demand protection of retail traders' funds, offer NBP. But there are also brokers which offer negative balance protection even being registered in countries that do not have such a requirement. It is important to remember that usually, such brokers either do not operate in countries that prohibit the protection of traders' funds or do not offer NBP to traders in those countries. Here is a list of several Forex brokers that offer negative balance protection even though their regulators do not require it.

RoboForex

RoboForex Ltd is a Forex broker regulated by the IFSC Belize. It does not offer services in the EU as well as a range of other countries, including the USA, Canada, Japan, Australia, and others. The broker states on its site that it offers negative balance protection. Yet the Client Agreement says that the client should pay within two business days any amount that exceeds the equity of the account. Such phrasing does not sound like the broker is actually going to zero out the negative balance on the account. Responding to the request for clarification, the broker said that it has negative balance protection, though it reserves the right to exclude accounts from the program, meaning that the account must be deposited before further trading is possible.

easyMarkets

easyMarkets is a trading name of EF Worldwide Ltd which is licensed by the Financial Services Authority of Seychelles. The company also has subsidiaries that are licensed by various other regulators, including the CySEC. The broker's website specifically mentions that the broker is not under the supervision of the JFSA and therefore does not provide services for residents of Japan. Additionally, the broker does not provide services in a significant number of other countries, including the United States of America and Israel. The broker's website states that easyMarkets provides negative balance protection and explains why such protection is important. Indeed, the Open Execution Policy, listed in the Legal Documents portion of the site, states that "in case the client balance goes negative after all positions close, the Company will cover the negative balance and will not request from Clients to cover the required amount".

eunic-brussels.eu

eunic-brussels.eu is a Forex broker operated by XM Global Limited, which is a member of Trading Point Group and is licensed by the International Financial Services Commission (IFSC) in Belize. The group also has a branch that is authorized and regulated by the CySEC. eunic-brussels.eu does not provide services for residents of some countries, including the United States of America, Canada, Israel, and the Islamic Republic of Iran. In its Terms and Conditions, the broker specifies that it offers negative balance protection on a per-account basis, meaning that the maximum loss is limited to the funds in the account. Yet the broker also warns that it can refuse to apply the NBP policy at its discretion if the broker finds the trading activity to be suspicious.

IC Markets

IC Markets is a Forex broker registered with several regulators, including the CySEC and the ASIC. Its global branch is regulated by the Seychelles Financial Services Authority. The broker's website states that the information on the site is not intended for residents of the USA, Canada, Israel, New Zealand, Japan, and Iran, suggesting that the broker does not provide services for residents of those countries. On some broker lists, IC Markets is mentioned as a broker offering negative balance protection. Of course, the European and Australian branches offer such protection due to the requirements of regulators in the European Union and Australia. The situation with the global branch is more complicated. The FAQ section on the site says in regards to NBP that "you are protected from having your account go into the negative and will quickly return to a zero balance". Yet the Terms and Conditions do not mention the NBP at all. On the contrary, the document states: "We have the right (at any time) to set off any losses incurred or any amounts you owe in respect of your Transactions or any debit balances in any Account. If any loss or debit balance exceeds all amounts held, you must immediately pay us any excess whether demanded or not." Responding to the request for clarification, the broker said that all account holders have negative balance protection, meaning that any negative balance will be zeroed out.

FXChoice

FXChoice is a Forex broker regulated by the IFSC of Belize. The broker states that it has negative balance protection, though it is not on a per-account basis, meaning that the broker can aggregate funds on other accounts to offset negative balance. If that is not possible, though, FXChoice will simply zero out the account.

If you want to share some details about your case of experiencing negative account balance or NBP working in Forex, please feel free to do so using our discussion forum.

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What is the difference between equity and balance in forex trading? While equity is a dynamic value that reflects the changes in open trades, balance is the amount of initial funds in your trading account. Every trader should be able to understand the difference between equity and balance as they are two crucial aspects of forex trading. Fundamentally, while they may reflect the same amount sometimes, equity and balance are two different amounts.

What is Balance? 

The account balance, or simply balance, is the amount of money in your forex account. If you deposit $ into your account, then the balance will be $ The balance is not affected by your trading activity until you close your open trades. Balance doesn’t include any profits or losses that are to be realized by open trades, only reflects profits/losses from closed positions. It changes only when you deposit funds or close a trading position. Swaps and rollover fees also affect your account balance if you keep a trade open overnight. 

The balance is displayed on the MT4 trading platform in the Terminal window under the Trade tab. 

What is Equity? 

Equity reflects the current value of the trading account and fluctuates according to changes in open trades. It is the account balance plus unrealized profits/losses associated with open trades. Equity also takes into consideration the trading costs like swaps and commissions. 

For example, if a trader goes long on the EUR/USD pair and the trade is showing a floating profit of $ Let’s assume the trading balance is $ In this case, the balance would be $ while equity will be displayed as $ This amount will keep fluctuating until the trade is closed, then it will be reflected automatically on the account balance.

Related Equity Terms: 

• Balance Equity: it refers to the total funds in the trading account when there are no open trades. 
• Floating Equity: it is the future or unrealized profits and losses that are not reflected on your balance yet. This amount fluctuates as long as the trades are open. 
• Negative Equity: it happens when unprofitable trading ends up wiping the trading account. Yes, some traders may end up with greater losses than their balance. But luckily, many forex brokers offer a negative balance protection feature that helps traders avoid such incidents.  

Equity and Margin 

The margin is the amount of capital required to open and maintain trading positions. It acts like collateral that is kept aside by the forex broker in order to keep a trade open and ensure that potential losses are covered. The margin is released back into the account balance once the trade is closed. 

Free margin is calculated by subtracting the margin from the equity, and it is the available margin to open new trades. When there is no sufficient free margin to keep trades open, the trader is notified to top up the account with funds. This is known as the margin call. 

The formula for calculating the margin level is:

Equity Vs Balance Explained 

The account balance is all the existing cash capital in your account. While equity is the balance +/- unrealized profits or losses. The balance and equity are equal in case you have no open trades. 

Equity is usually lower than balance when the open trades are losing or when profits are smaller than swap and paid a commission. On the other hand, equity is higher than balance when existing trades are winning, and profits are greater than trading costs. So, equity reflects the variable value of the trading account, a real-time reflection of current profits/losses.  Sometimes it is referred to as the floating account balance. 

How important is it to track your Trading Equity?

Let’s begin by exploring an alternative definition of equity, which refers to the combined value of a trader’s forex balance and any unrealized profits or losses related to their open trading positions. Equity is a reflection of the current status of all active trading positions.

When the margin is subtracted from equity, the remaining amount is referred to as free margin, which can be utilized to initiate new trades. However, if the free margin isn’t adequate to sustain existing trades, the broker will send a notification to the trader to top up their balance. Failure to respond to this margin call will result in the broker forcibly closing all open positions if the market moves unfavorably to the trader.

The notification from brokers for traders to add funds to their accounts is commonly known as Margin Call, while the situation where brokers forcibly close a trader’s positions due to insufficient funds is called Stop Out. Margin call and stop out limits differ among brokers and are typically detailed in the specifications for a forex account. As a trader, it is crucial to keep track of your equity and free margin levels to avoid losing your trading deposit.

Forex Balance Vs Equity: What Matters Most?

Equity and balance clearly differ significantly from one another. Additionally, we now understand which one requires closer attention. Due to the vital components, it contains, failing to pay attention to your equity will only hinder your ability to trade profitably. The balance, however, does not contain any items that are important enough to influence the results of deals.

The progress of your equity will depend on how well your trading strategy and risk management concepts work together with your money management. It will also have an impact on how many trades you can execute using the money indicated in your forex balance. Due to the fact that doing so will merely bring your account closer to the stop-out level, you cannot afford to trade recklessly or haphazardly. Your equity will no longer be able to sustain additional trading activities once it hits that point, and your FX balance will be zero.

How to Open Forex Account in a Few Steps

A forex account is used to trade foreign currencies. Typically, you open an account, deposit money and then buy and sell currency pairs. Opening a forex trading account is a quite simple process these days given the growth of online forex trading. It requires some paperwork and a few security steps, such as identity verification, and all can be done online. But first, you’ll have to choose your forex broker, select an account type, register then activates your account. 

You can choose between various account types, based on your trading strategy, experience, and capital designed for investment. Choices include Standard, Cent, or ECN trading accounts. Enjoy favorable trading conditions with Aximtrade; especially when it comes to margin and leverage levels. You can control your real-time risk exposure by monitoring your used and free margin as together make up your equity. 

AximTrade provides a leverage range that helps you choose your preferred risk level. The leverage ratio depends on your account type and equity, up to infinite leverage, and can be reduced by applying custom leverage.

Follow these steps to open a forex account with AximTrade:

1. To open a forex account, log in to your member account from AximTrade login, and click on the “+ Open Extra Account” button on the top right. 
2. Choose your preferred account type. You can choose between Standard, Cent, and ECN accounts. You can also choose a demo account if you’re a beginner. 
3. Select your account and press “Open”. 
4. Name the Account and create both trading and investor passwords for your account. The investor password should not be the same as the account password. Remember to use both uppercase and lowercase letters and use a combination of numbers and letters. Then click “Done”.
5. Now your account is ready for trading. You can find all your accounts in the “My Accounts” tab. 

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Currency trading offers a challenging and profitable opportunity for well-educated investors. However, it is also a risky market, and traders must always remain alert to their positions—after all, the success or failure is measured in terms of the profits and losses (P&L) on their trades.

It is important for traders to have a clear understanding of their P&L because it directly affects the margin balance they have in their trading account. If prices move against you, your margin balance reduces, and you will have less money available for trading.

Realized and Unrealized Profit and Loss

All your foreign exchange trades will be marked to market in real-time. The mark-to-market calculation shows the unrealized P&L in your trades. The term "unrealized," here, means that the trades are still open and can be closed by you any time.

The mark-to-market value is the value at which you can close your trade at that moment. If you have a long position, the mark-to-market calculation typically is the price at which you can sell. In the case of a short position, it is the price at which you can buy to close the position.

Until a position is closed, the P&L will remain unrealized. The profit or loss is realized (realized P&L) when you close out a trade position. In case of a profit, the margin balance is increased, and in case of a loss, it is decreased.

The total margin balance in your account will always be equal to the sum of the initial margin deposit, realized P&L and unrealized P&L. Since the unrealized P&L is marked to market, it keeps fluctuating, as the prices of your investments change constantly. Due to this, the margin balance also keeps changing constantly.

Calculating Profit and Loss

The actual calculation of profit and loss in a position is quite straightforward. To calculate the P&L of a position, what you need is the position size and the number of pips the price has moved. The actual profit or loss will be equal to the position size multiplied by the pip movement.

Let's look at an example:

Assume that you have a , GBP/USD position currently trading at If the prices move from GBP/USD to , then they jumped 15 pips. For a , GBP/USD position, the pips movement equates to $ (, x ).

To determine if it's a profit or loss, we need to know whether we were long or short for each trade.

Long position: In the case of a long position, if the prices move up, it will be a profit, and if the prices move down it will be a loss. In our earlier example, if the position is long GBP/USD, then it would be a $ profit. Alternatively, if the prices had moved down from GBP/USD to , then it will be a $ loss (, x ).

Short position: In the case of a short position, if the prices move up, it will be a loss, and if the prices move down it will be a profit. In the same example, if we had a short GBP/USD position and the prices moved up by 15 pips, it would be a loss of $ If the prices moved down by 20 pips, it would be a $ profit.

The following table summarizes the calculation of P&L:

Another aspect of the P&L is the currency in which it is denominated. In our example, the P&L was denominated in dollars. However, this may not always be the case.

In our example, the GBP/USD is quoted in terms of the number of USD per GBP. GBP is the base currency and USD is the quote currency. At a rate of GBP/USD , it costs USD to buy one GBP. So, if the price fluctuates, it will be a change in the dollar value. For a standard lot, each pip will be worth $10, and the profit and loss will be in USD. As a general rule, the P&L will be denominated in the quote currency, so if it's not in USD, you will have to convert it into USD for margin calculations.

Consider you have a , short position on USD/CHF. In this case, your P&L will be denominated in Swiss francs. The current rate is roughly For a standard lot, each pip will be worth CHF If the price has moved down by 10 pips to , it will be a profit of CHF To convert this P&L into USD, you will have to divide the P&L by the USD/CHF rate, i.e., CHF ÷ , which will be $

Once we have the P&L values, these can easily be used to calculate the margin balance available in the trading account. Margin calculations are typically in USD.

The Bottom Line

You will not have to perform these calculations manually, because all brokerage accounts automatically calculate the P&L for all your trades. However, it is important that you understand these calculations, as you will have to calculate your P&L and margin requirements while structuring your trade—even before you actually enter the trade.

Depending on how much leverage your trading account offers, you can calculate the margin required to hold a position. For example, if you have a leverage of , you will require a margin of $1, to open a standard lot position of , USD/CHF. Having a clear understanding of how much money is at stake in each trade will help you manage your risk effectively.

Forex trading is a highly speculative market where traders buy and sell different currencies with the aim of making profits. However, trading in the forex market is not as simple as many people assume. One of the most important concepts that traders need to understand is balance. Balance refers to the amount of money in a trader&#;s account that is available for trading. In this article, we will explore what balance means in forex trading and why it is crucial for traders to maintain a proper balance.

What is balance in forex trading?

Balance in forex trading refers to the amount of money that a trader has in their account that is available for trading. This balance includes the initial deposit made by the trader, any profits made from successful trades and any losses incurred from unsuccessful trades. It is important to note that the balance in a trader&#;s account is not the same as their equity, which refers to the actual value of their account after factoring in any open trades.

Maintaining a proper balance in forex trading is crucial because it determines the amount of leverage that a trader can use. Leverage is a tool that allows traders to increase their position size and potential profits, but it also increases the potential losses. A trader with a high balance can use high leverage, while a trader with a low balance has to use low leverage.

Why is balance important in forex trading?

1. Risk Management

Maintaining a proper balance in forex trading is crucial for effective risk management. A trader with a low balance cannot afford to take high-risk trades as the potential losses could wipe out their account. On the other hand, a trader with a high balance can afford to take high-risk trades as they have a larger cushion to absorb any losses.

2. Trading Psychology

Balance also plays a crucial role in a trader&#;s psychology. A trader with a low balance may feel anxious and stressed when trading, which can lead to emotional decision-making and poor trade execution. On the other hand, a trader with a high balance may feel overconfident and take unnecessary risks, leading to potential losses.

3. Profit Potential

Maintaining a proper balance also determines the profit potential of a trader. A trader with a high balance can trade larger positions and potentially make more profits. However, it is important to note that larger positions also come with higher risks, and traders should always trade within their risk tolerance.

How to maintain a proper balance in forex trading?

1. Money Management

Money management is the key to maintaining a proper balance in forex trading. Traders should always have a clear plan on how much they are willing to risk per trade and should never risk more than they can afford to lose. Traders should also use stop-loss orders to limit potential losses.

2. Use of Leverage

Traders should use leverage wisely and only when necessary. High leverage can increase potential profits, but it also increases potential losses. Traders should always consider their risk tolerance before using leverage.

3. Trading Plan

Traders should have a clear trading plan that includes entry and exit points and should stick to it. A trading plan helps traders to stay disciplined and avoid emotional decision-making.

Conclusion

Balance is a crucial concept in forex trading that determines a trader&#;s ability to take risks and potentially make profits. Maintaining a proper balance requires effective money management, wise use of leverage, and a clear trading plan. Traders should always consider their risk tolerance and avoid taking unnecessary risks that could lead to potential losses. By maintaining a proper balance, traders can achieve long-term success in the forex market.