Atomic Shelter – Forex Negative Balance Protection and the SNBomb

Why a Negative Balance Protection is Now a Must after the SNB Decision?

It was Thursday the 15th of January 2015 and I was in front of my charts as usual, looking for trades. Everything’s within normal, boring parameters but little do I know about what’s going to happen: the Swiss National Bank is just about to drop a Bomb and to make this day a historical one, which will not be forgotten very soon. Many of you are aware of what that bomb was, but here’s a basic breakdown of the events and a reason why I think you need a broker who offers negative balance protection.

 

The Long Story Short – SNB Drops the Bomb on Forex Brokers and Traders

About three years ago the Swiss National Bank installed an artificial “floor” for the EUR/CHF pair around 1.20, meaning that for 1 euro you would pay 1.20 Swiss francs. I will not go into the details of why they needed or wanted to do that, but keeping this barrier in place began to be harder and more costly, mainly because the euro weakened severely throughout the last months and people expected it to weaken further during the coming week. So the Swiss National Bank decided to swipe the rug under everybody’s feet and to stop pumping money to artificially keep the 1.20 cap. To say it was a surprise would be an understatement because all hell broke loose: the EUR/CHF dropped from 1.20 to a low of 0.75 (the low differs from broker to broker) before climbing to about 1.03. That’s a move of about 4,500 pips down followed by 2,800 up, all in a few hours. The initial drop took about 20 minutes on my charts and during that time I saw spreads of 300-500 pips and price simply jumping for about 300 to 500 pips… and by jumping I mean moving such distances in a matter of seconds.

 

The Aftermath – Recovery Needed

The CHF strengthened tremendously when the bomb was dropped and as a result the EUR/CHF pair plunged (the same for USD/ CHF). Traders who were short CHF (long on USD/CHF, EUR/CHF) lost huge amounts because the majority of Stop Loss orders around the world went straight to the bin. Liquidity providers couldn’t provide quotes to the brokers and this meant that price gaped past the Stop Loss orders. You could call it slippage but it was in fact a slippage on steroids, the mother of all slippages… and also the reason why many traders wish their broker had negative balance protection. Allow me to explain: if your Stop Loss is not executed, your entire account can be wiped out considering the fact that most traders use leverage and that price moved thousands of pips. That’s bad… but it can get worse: given the huge move, many accounts went into negative territory so traders ended up owing money to the broker. Under normal circumstances, a Margin Call from your broker prevents negative balance, but in conditions such as the ones under discussion, trades couldn’t be stopped even by Margin Calls because there were no quotes, no price where to close a trade. A few brokers went out of business and some suffered huge losses [1]… and who do you think will have to pay for those losses? The traders who have a negative balance. After all, if you trade with leverage, you borrow money from your broker and if your account is in the “minus” zone, how can you pay it back? This is when it turns ugly because the brokers will resort to legal action against their clients. It has been reported that clients owe FXCM 225 million USD which resulted from negative balances (and although this is the highest sum, there are other similar cases). So bottom line is: if your account balance shows –100$ or -10,000$ or whatever, you have to pay that sum to your broker… unless you are trading with a broker that offers Negative Balance Protection. This means that if your account goes negative, the broker will make it Zero, wiping out the debt. Sure it’s still a bad thing but I think losing your entire account is better than losing your entire account and owing some money on top of that.

 

Editor’s Note – A Strong Lesson to be Learned and Balance Protection

I said many times before that you need to read the Terms and Conditions and I believe that in light of recent events, many people will start to do it. My broker offers Negative Balance Protection so all clients who had their accounts in negative territory don’t owe anything. When I opened an account I took the time to read the Terms and Conditions and yea, it was boring but… better bored than broke. I’d recommend opening accounts only with brokers who offer Forex negative balance protection, even if events like the SNBomb don’t happen every week. But hey, when they happen you don’t want to be caught with your account in the red… or should I say, red-handed.

 

[1] http://forexmagnates.com/forex-industry-battles-eurchf-meltdown-real-time-updates/

 

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