Can You Lose More Than You Invest With Leverage?

This is how much you can lose with leverage (more than you invested)

When you open an account to trade with leverage it is possible to lose more than you have invested and this goes for all asset classes and all markets including forex, stocks, and crypto trading.

The correct question we should be asking ourselves is whether it is possible to lose more than you have invested when trading on a CFD broker, Forex broker, or a cryptocurrency exchange.

It has nothing to do with the specific market, instead, it depends on what type of broker you are using.

Now, you can only go into a negative balance in your trading account if the platform you are using does not offer proper risk management tools to stop losses from becoming larger than the total value of your account.

If your broker doesn’t offer negative balance protection, losses can continue past your deposit until the broker forces a liquidation. In that scenario, you owe the deficit.”

Without negative balance protection, it is possible to lose more than you invest in forex and other markets due to overleveraging your trading account and not closing out the losses before they get too big.

This is how these types of accounts work

Can you lose more than you invest with a leveraged trading account and how does the negative balance protection work?

Anyone trading with margin needs to understand how the account behaves under stress. A lack of margin knowledge leads to forced liquidations, not just losses.

There are two types of trading accounts:

1. With negative balance protection (safe)
2. Without negative balance protection (risky)

There are also two components to an account that has a multiplier:

1. Margin collateral = Your own money
2. Leverage = The borrowed money

Each position is built up of your margin collateral (your deposit money) and the credit (the borrowed money) that you receive from your broker.

Your losses and profits are calculated on the total position value with both your money and the borrowed funds combined.

Example 1 of an account with negative balance protection.

For example, if you deposit $500 and you use a 1:75 ratio your buying power is $37,500. Now, if you take a -1.5% loss, that would mean a total loss of -1.5% on $37,500 which is -$562,50.

In this case, your total margin balance was $500 and would not be able to withstand a loss of -$562,50. What happens here, assuming that your broker has negative balance protection, is that your broker liquidates your account to prevent further losses from happening.

That was an example of an account with negative balance protection

Example 2 of an account without negative balance protection

Let’s say that you know how to pick leverage ratio for 1000 USD and you use 100x leverage to trade USD/GBP.

This would give you a buying power of $100.000.

Now, if your trade goes against you with -2% you have an open loss of -$2000.

That’s more than the total account value or the initial deposit that you made.

In this case, the broker will let your open loss fall freely until you close it out yourself.

This can cause huge losses and in some cases, you can even go into debt with your forex or stock broker if you are not able to directly pay back the loss.

Warning signs that you are about to lose all your money

What happens if you use leverage and lose?

Every margin account has a feature called margin call which is a warning signal that you are close to losing your margin collateral.

• A margin call signal to the trader that he is almost out of funds to support the overall losses in the margin account

This means that your open losses have almost surpassed your total account balance and you either need to close out the position by taking the loss or deposit more funds to withstand the losses.

How to deal with a margin call?

There are three things you can do when receiving a margin call. First, you can close out the position and take the loss. This is usually the recommended choice unless you are a very experienced trader.

Adding funds to meet a margin call only makes sense for traders who already have a tested plan and a reason to stay in the trade. With no clear strategy, it usually compounds the mistake.

Thirdly, you can wait and do nothing and hope for the best. This option is the riskiest as you are essentially leaving your account to chance.

5 ways that can protect the money in your margin account

Can you lose more than you invest with a multiplier in any type of account?

As mentioned earlier, the best way to protect your leveraged account against unwanted losses is to use a broker that supplies negative balance protection.

However, the negative balance protection feature is only good in a worst-case scenario where you run the risk of losing all your margin collateral.

Here are 5 other tips that can help you when trading with credit:

• Use a stop loss – A stop loss is a tool that limits the loss of a trade to a certain dollar value or a percentage. When opening a position in the FX markets you can add a stop loss that will automatically close your position if the position goes against you and causes a -$50 loss.
• Use isolated margin – Isolated margin will isolate the margin requirement for each position you open. This will prevent one position from losing all your collateral money in your account and will instead only lose the amount that was required to open that position alone.
• Calculated your leverage – Run the numbers on your required margin and liquidation level before opening a position. A calculation won’t protect you, but it gives you clarity on how fast your risk escalates.
• Use the right strategies – The trading strategy that you choose is going to determine how successful your operations are going to be. This goes for both profits and losses. A strategy in leveraged markets should focus on loss control first. Profit comes second, because the downside moves faster than the upside.
• Choose the right leverage ratio – Choosing the optimal leverage ratio in FX markets is a key part of finding the right mix of credit for your account. Lower leverage stretches out your risk window, letting you stay in the market long enough to learn from it. High ratios shorten that window to a point where one mistake ends the session.

Frequently asked questions