Financial market participants often dream about cashing in their profits, but don’t spend nearly as much time thinking about preserving their accounts. While profitability is the most desired outcome of trading, it cannot be achieved consistently without capital preservation. After all, profits don’t mean much when they are squandered.
Negative balance protection – a feature that protects traders from going into debt on a losing deal – is one tool that may help traders preserve their capital. Before doing business with any broker, a trader should ask themselves this important question: Am I covered?
Negative balance protection offers peace of mind knowing that a bad trade will never result in going into debt. When it comes to trading, a bad deal is usually tolerable, but going into debt is unacceptable. After all, you should never trade (or lose) more than you are willing to risk.
In the world of trading, negative balance protection usually takes the form of a margin call or stop loss rate, which automatically closes out an open losing position. Without it, there’s a distinct possibility that a losing position will continue to plunge into negative territory. This is especially crucial for traders who don’t close out their positions at the end of the day or don’t have time to monitor their positions 24/7.
It’s important to note that not all brokers offer negative balance protection. Unestablished service providers like to throw around the term “guaranteed margin call” without actually offering traders any protection. In general, traders should only consider doing business with regulated brokers that have been around for a decent number of years’ time. These brokers are more likely to honour their pledge of protecting negative balances.
Features like negative balance protection are considered especially important in today’s highly turbulent market environment. This year alone, the market has experienced several violent selloffs that were triggered by entirely different events. The financial markets had one of their worst starts to a year on record in 2016, as renewed volatility in China triggered a widespread global selloff. Those pressures re-emerged in February, as oil prices plunged to 13-year lows.
Fast-forward to June 23, when the United Kingdom voted to leave the European Union (EU). That shocking decision triggered the biggest one-day equities selloff ever.
By early September, US and global stocks were being pummeled by speculation that the Federal Reserve may continue raising interest rates sooner rather than later.
Currencies and commodities have been extremely volatile this year, and will likely remain so as economic and political forces continue to play out.
All of these examples demonstrate why capital preservation in general and negative balance protection in particular are important. Traders must always ensure they are protected against the unknown.
easyMarkets, a CySEC and ASIC regulated broker, has built a reputation of trust, consistency and transparency for more than 13 years. As part of its commitment to providing traders with the best risk management tools and features, easyMarkets offers guaranteed balance protection on every account. Whether you’re trading CFDs, spot commodities or options, easyMarkets guarantees that your account is protected against negative balances. This gives traders the ability to focus their efforts on picking winning trades, rather than worry about market conditions they cannot control. That’s why easyMarkets offers guaranteed negative balance protection and why it will continue to do so in the future.
Risk warning: Forward Rate Agreements, Options and CFDs (OTC Trading) are leveraged products that carry a substantial risk of loss up to your invested capital and may not be suitable for everyone. Please ensure that you understand fully the risks involved and do not invest money you cannot afford to lose. Our group of companies through its subsidiaries is licensed by the Cyprus Securities & Exchange Commission (Easy Forex Trading Ltd- CySEC, License Number 079/07), which has been passported in the European Union through the MiFID Directive and in Australia by ASIC (Easy Markets Pty Ltd -AFS license No. 246566).
 Edward Krudy (June 26, 2016). “Post-Brexit global equity loss of over $2 trillion worst ever: S&P.” Reuters.
 Adam Samson (September 9, 2016). “Fed’s Rosengren sees ‘reasonable case’ for rate rise.” Financial Times.