A question came up recently on the topic of whether you could lose more than your initial account deposit when trading a margin-based market such as forex or futures. The short answer to that question is “Yes”.
Any time you are putting on positions in the market which have values larger than the value of your account, there is the risk of losing more than what you have in the account. That’s the flip side of the leverage equation. Margin trading can mean spectacular returns, both positive or negative.
Having said that, the chances of actually losing your whole account value are not very good. In fact, if you trade with any kind of sense of the risk involved, you will never put yourself in to a position to lose that much money. If you have your full account at risk on any given trade, or set of trades, then you are trading MUCH too big.
Remember that a key part of success in trading is making sure you keep yourself in the game through the inevitable rough patches that are going to happen. Even if you have a trading strategy that is 99% right, there is still that 1% opportunity to take a loss. If you put a substantial portion of your portfolio at risk, when that 1 in 100 loss comes around it could completely destroy your account, wiping out any and all gains up to that point. Make sure you never put yourself in that situation.
Pontification on risk management aside, there are also some mechanical things that can prevent you actually losing your full account value. Many brokers (but not all), especially in forex, will automatically close out open positions if the account value falls below the required margin deposit for those positions. That means you cannot actually ever lose everything. The broker’s system would prevent that.
If your broker does not have that kind of automatic mechanism in place, though, then you could indeed lose more than what you put in by the time they get around to making a margin call and whatnot.
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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
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