Contract for Difference (“CFD”) trading is a popular form of investment, but as with any investment, it involves a degree of risk. Managing risk in trading is critical to protect your capital from excessive losses. There are many ways traders can mitigate or lower their risk exposure, and one of them is negative balance protection.
- Negative balance protection is a safeguard provided by many regulated brokers that ensures traders cannot lose more money than they have deposited in their accounts, preventing debt to the broker from trading losses.
- This protection mechanism is essential during volatile market conditions where leveraged positions can lead to a negative account balance; with negative balance protection, the trader’s losses will be limited to the initial capital, and the account will be reset to zero.
- Traders can also mitigate the risk of exceeding their initial capital by staying informed about market conditions, adequately funding their trading account for margin requirements, and setting stop-loss orders to automatically close trades at a predetermined price level.
What is Negative Balance Protection?
Negative balance protection is a system put in place by most regulated brokers to help protect traders against losses that exceed the amount of capital they have deposited. In other words, you will not lose more than what is on your account as any losses which go into the negative territory will be covered by the brokers.
How Can Negative Balance Protection Work For You?
For example, a trader deposited $100 and decided to open a trading position with high leverage. Unfortunately, the market was volatile and the position was force-closed in response to a sharp drop in price, wiping out the $100 of initial capital and leaving another $20 in negative balance due to leverage.
In this case, without negative balance protection, the trader would have to repay the $20 owing to the broker. However, under negative balance protection, the loss will be capped at $100 and the account balance will be restored to zero.
Hence, trading with a broker which offers negative balance protection essentially lowers your risk exposure and assures that you will never lose more than your account balance.
How else can you prevent losses that exceed initial capital?
Market conditions can vary dependent on the financial instrument traded. To prevent losses that may exceed capital, here are 3 things traders can consider doing:
1. Remain vigilant of market conditions
By staying alert of changing conditions in the financial markets, traders are encouraged to reduce exposure or trade with lower leverage when markets are highly volatile. Volatile markets can cause huge price whipsaws, which may result in a negative trade balance.
2. Ensure trading account be properly funded
Having sufficient capital for required margins in one’s trading account allows leveraged positions to have more breathing room.
3. Set a stop loss for your trades
Stop losses can prevent a large losing position from getting out of control by pre-allocating a limit to which the trader is willing to lose. This is done by setting a price for your stop-loss, at which your trade will close once the price level is met.
Does Vantage offer negative balance protection?
Retail traders can be protected from losing more money than they deposit into their trading account with negative balance protection. However, this feature is not offered by all brokers. In the unfortunate event that your trading account falls to a negative balance, you can reach out to us through the mediums listed here.
This allows us to assess and determine whether your account qualifies for restoration to zero balance*, after which you may continue to deposit funds and resume trading normally. Negative balance resulting from trading abuse (such as excessive leverage or position size during periods of high volatility) will be evaluated on a case-by-case basis and may not be eligible for the protection.
Vantage fully understands and comprehends that such events are uncommon occurrences, hence, please remain vigilant of market conditions and ensure your trading account is properly funded.
*Subject to risk assessment and approval. Terms and conditions apply.