Recently, there has been a lot of talk about new ESMA restrictions that drastically limit the leverage on Forex. Many traders are looking for alternatives and so find foreign regulated brokers, e.g. in Australia, who have no negative balance protection. Beginners reading that the XYZ broker has a large leverage and lack of overdraft protection gives up trying to change the platform in fear of building a negative balance.

This approach obviously results from ignorance and in today's article I will explain exactly how the negative balance works for unsecured brokers. At the outset, I note that there is really nothing to be afraid of, and falling into a negative balance is not so simple.

What does negative balance protection really mean?

This means that in the event that the broker fails to close the position on time so that the client does not lose more than he has on the account, the broker covers your losses and gives you the guarantee that you do not have to pay extra funds to settle the amount. A broker without such protection will also do everything so that you do not fall into a negative balance, but if he fails, you will simply have to pay a little extra to the account.

So if you invest with a broker without overdraft protection like for example IC Markets and the price will gradually drain your account, there is practically no chance of falling into a negative balance because the broker calmly manages to close the position at Stop Out.

The situation in which you hold your position over the weekend can be problematic, and on Monday the market will open with a price gap that is to your disadvantage. Then there is no chance for the broker to close the position so that you do not fall into a negative balance and you will simply have to pay extra funds.

How to avoid falling into a negative balance?

• Don't play during economic events. Strong price movement may cause that the broker will not be able to close the position on time.
• Don't keep your position for weeked. Imagine holding a position on EURUSD and a bomb falls on the United States over the weekend. The market may open at a very unfavorable price for you, which will result in Margin Call.

If you stick to the above rules, you won't fall into a negative balance at 99%. However, there are unpredictable situations and you do not know when the bomb will hit the United States, which will reset your account.