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Negative balance protection is a type of account safety feature which ensures that the trader is not responsible for balances below zero. Negative balance protection is not always offered, but in some regions it is mandatory. Balances below zero can happen in leveraged trading in certain market conditions. However, this also means that a trade or trades can deplete all of the account. So let's take a look into what can happen to accounts that might deplete them in such a drastic manner and what protections may exist.

When trading Forex, the market will generally move either in favor of the position or against it (it can also stay the same in conditions of very low volatility). When it moves in favour of the position (e.g. a long trade goes up), it will add value to the account. Conversely, when it goes against the position, it will subtract from the account value. This unrealised change in account value is not realised until a position is closed. But it still has consequences while the position is open.

In non leveraged trading, the worst that can happen is that the value of the position goes to zero (this is normally unlikely, but can happen if the business fails for example). However, in leveraged trading, the account value could go negative in the course of trading, and some providers allow this to happen.

When trading with leverage (on margin), only part of the full cost of the trade is put up (margained) by the trader. However because only part of the cost is put up, then the full cost can in theory exceed the amount put up by the trader, which could depending on a range of factors, exceed the account value. Putting it another way, it is possible to have a total value of open trades which exceeds the account value, due to the fact that only part of the cost of the trades is margained from the account.

Relative to an equivalent non leveraged position, both profits and losses are magnified. If a certain sum is margained to cover a trade, then it is equivalent to a larger non leveraged trade. Thus the speed at which losses can mount (as well as profits) is the same, but there may not necessarily be enough in the account to cover these losses (which there will be for an unmargained trade, as asset values do not go negative). In effect leveraged market values can go negative. But how likely is this to happen and are there protections in place or accessible to prevent this ?

Markets can move fast and stop-losses are not always guaranteed, or used. Stop-losses are a way for a trader to protect a particular position from negative moves. In a fast moving market, a leveraged position could produce losses exceeding the total value of the account (as less than the full value of the position is required to open a leveraged position).

The trader may have multiple positions open at a given time, and all these affect the value of the account (until realised by being closed). The total equity in the account is generally defined as the cash in the account plus any unrealised profits or losses (there may be additional items depending on the jurisdiction). It can be seen that this total can be affected by factors such as withdrawals, deposits or by changes in the value of trades.

The margin or stop out level is the total equity divided by the total margin used by trades times 100 - i.e. it is a percentage of total margin to equity. This percentage cannot generally go below a certain level without affecting open trades, which is called the stop out or margin closeout (different providers may use different terms). At this level, positions will generally be closed or start to be closed. A margin call is a warning that this can happen, as the account approaches the closeout level, allowing the trader to add more funds to their account to prevent position closures. So a margin call level will tend to be higher than a stop out level.

The level of a stop out can vary at different providers, but some jurisdictions set a minimum figure (e.g. 50%). What this means is that there is still a cushion in terms of the equity in the account relative to the margin needed for all open trades, but it has a reached a level where it is only 50%. So instead of letting the equity be the same or less than the margin required (which can happen with leverage), providers (or their automated systems) step in before this happens.

One thing to note is that the provider may change the stop out and margin call level upwards from the minimum. The value in the account is affected this way because there needs to be money to cover losses which may be accumulating, and with leverage there may not be. However what happens in a very fast moving market ?

A fast moving market can plunge an account into the negative very quickly, cutting through other defences such as stop out levels. What negative balance protection does is to provide a final protective barrier to prevent the trader from having not only to deal with a zero account balance, but also to cover a deficit. If the trader uses a provider which does not offer negative balance protection, then they need to consider that they may have to add money to a depleted account to cover losses from trades, which could be substantial in certain situations.

These are extremes, and the trader will use risk management to reduce the probability of a situation like this happening. This includes stop-losses to protect individual positions, checking for very volatile market conditions (using an Economic Calendar for example), having an exit strategy and a strategy for controlling position sizes and not overloading the account with open positions. One approach is to use small trade sizes, or at least trade sizes commensurate with the account size.

It can be tempting to use high leverage for higher trade sizes, but this can be a route to a stopout or margin closeout, as it produces larger changes in account value both positive and negative (hence increasing leverage increases risk). Additionally, the trader can make sure that they have significantly more in the account than simply covering the open trades' margin plus a required cushion. These steps (and others) can help reduce risk, but not eliminate it. Trading is risky and leveraged trading magnifies this risk.

A few years back, many providers allowed margained accounts to go negative and a risk warning such as 'losses can exceed deposits' could be seen. However some jurisdictions set rules such that accounts cannot remain negative, meaning that there is negative balance protection built in.

It is still possible for accounts to go negative, but the trader would not be responsible for the amount below 0 and the account typically gets adjusted back to 0 from the negative level at some point, if this happens (e.g. on the next deposit, as it would be impossible to live trade on the account with a zero balance). It needs to be emphasised that negative balance protection is a kind of last line of protection, as the trader could still be left with nothing in the account, which would be highly undesirable.

Is it easy to deplete an account, in general ? While sudden moves that decimate an account may be relatively rare (and can be protected against, to an extent), repeated trades opened and closed can reduce an account towards 0 in a less intense way, but equally problematic. This does happen, and it can be where emotions overwhelm the trader when stuck in a losing trade, as they keep on trying to get it all or at least some back with increasingly desperate trades. Trading discipline is one way to try and avoid this scenario, which is all too possible, even for very experienced traders.

Shutting down the computer and taking a break is something that can seem extremely hard to do in this situation, but once it is done, the trader can feel relief that they have protected at least part of the account and can continue to trade another day. Another way is to let a robot trade on their behalf. The robot can experience losses as well, but it won't have an emotional element and if the strategy works out may bring the account to the kind of balance expected of the strategy.

This is one reason why robots are used in complex markets like Forex, which can produce patterns that go sometimes deeply or repeatedly against the traded direction, even if they then recover and reach the target. Robots do not tire or get emotional, but will stay rational in even the most adverse market conditions, applying the rules specified in their algorithm. However algorithms bring their own risks, including the potential for rapid losses.

The human emotions of greed and fear, while they can be motivators, may also produce irrational trading that deepens losses. Conversely, the trader may be too cautious and not trust in their analysis or strategies, but robots do not have this problem. The market may also simply not behave as expected, which it most certainly can and does. All this said, when trading, even if they are following a set of rules, the trader has the discretion to break those rules and follow an emerging advantage or get out of a market moving in the wrong direction.

How likely is it that an account could suddenly plunge to zero and beyond ? To bypass other protections (such as a stop out) a fast moving market event is typically required. Events like this do happen. An example would be a sudden unexpected announcement by the Fed which plunges EUR/USD maybe a hundred pips or so almost instantly. This could have on a significant effect on a leveraged position with trade sizes relatively large to the account size (for example). Another example would be a trader not taking account of what scheduled news events are happening which could affect their trade. Pre-announced news events can also see sharp moves in a very short time. Another example would be a price gap, which also happens.

The trader can take some steps to protect themselves, by consulting an Economic Calendar to see what news might affect their trade during its lifetime. An Economic Calendar lists news events (typically data releases) and also helpfully shows what Forex pairs might be affected. So it can be used by those who want to trade the news and those who want to avoid being traded by the news. Economic Calendars are typically offered on the provider's website, online or increasingly embedded into the trading platform. For example, MT5, the successor to MT4 has an inbuilt Economic Calendar. There are also tools which use Economic Calendars, such as Acuity.

So to sum up, negative balance protection is to prevent rapid losses which push the account to zero and below (for example, when a market moves suddenly in the opposite direction to the trade, perhaps due to unexpected news). There are other protections which can come into play as an account depletes due to adverse trades, to stop the trader from over leveraging their account, for example. In general, the more regulated a provider is, the greater will be the extent of these protections.

These protections can include limiting one potential cause of all this, the leverage available in the account. In fact the reduction of maximum Forex leverage which happened in some jurisdictions a few years ago was motivated by a desire to protect the trader from the complexity and risks of Forex trading (and other markets). The greater the leverage, the greater the risk from adverse moves. Leverage risk is also relative to the account size, so increasing the account size is a way to manage this type of risk (including to some extent the risk of an account suddenly going to zero) but up to a point, as risk management is needed to protect some or all of it as well.

Outside of certain jurisdictions, providers may not offer negative balance protection. In some jurisdictions they have to, for retail customers, but not for professional clients (so negative balance protections may not apply to professional clients). However some providers are regulated in different jurisdictions, thus in some they may offer negative balance protections, in others they might not.

Not offering negative balance protections was associated to some extent (and still is) with providers which provide platforms and accounts for automated traders, perhaps on the understanding that such traders are more experienced. However, some such providers may now offer negative balance protections, even if they are regulated outside of the regions where such protections are mandatory. Please note that there may be terms and conditions associated with negative balance protection.

This pages lists a selection of prominent CFD providers (aka 'top forex brokers') with different characteristics which offer negative balance protection in all regulated jurisdictions.

These providers encompass one which focuses on those who plan and execute their own trades and who want an intuitive platform designed for the human trader (Plus500), one which is well established as a provider for automated trading and scalping, but now offers negative balance protection for retail traders (Pepperstone), one which caters to both those who want MetaTrader and those who want to use other types of platforms (AvaTrade) and one which focuses on MetaTrader, but provides a low minimum deposit and order size (XM).

In essence, these providers cover a range of types of trading practiced by Forex traders. The Forex market is complex and there are many styles used to try and tackle this complexity. It is open continuously from late Sunday to Friday (GMT) and is used extensively by high frequency traders, automated traders, scalpers and longer term traders.