Forex investing is more popular today than ever before, especially with new investors looking to get away from more traditional investment options like the stock market, real estate, etc. Unfortunately, a lot of new investors jump headfirst into the world of Forex without fully understanding the potential risks and downsides. One of these potential downsides is actually owing money to your forex broker, should the worst happen. With that being said, can you owe money on forex?
You can owe money on Forex. Forex trading is done on margin, which increases the amount of money you can make but also dramatically increases the risks. Leverage, coupled with slippage, can cause traders to owe their brokers money which must be repaid.
Can You Owe Money On Forex?
Right out of the gate, it’s important to understand that a lot of Forex trading happens “on margin”.
Forex margin trades
(sometimes called leverage trades) allow investors to trade with smaller amounts of money by “borrowing” funding from their broker on the trades they want to execute.
For example (just to keep things simple) let’s say that you deposit $1000 into your Forex account.
A lot of brokers (including top-of-the-line, trusted brokers) are going to give you access to a huge multiple of that money to trade with – most of the time 100:1 of what you have put down into your account.
This would mean for example that you wouldn’t have access to just $1000 to invest with, but that you’d have up to $100,000 worth of currency to trade in Forex.
Taking this further, let’s say that you decided to invest $100,000 on a EUR USD trade. Let’s further say that the Euro dropped 2% in value after the trade was executed, basically bringing your Forex trade account down by $2000 – which means you would owe a thousand dollars to the broker.
The overwhelming majority of brokers are going to zero out your account (cashing out your positions) as soon as you get close to going negative, looking to protect themselves as much as possible, though.
Still, the potential is there for you actually owe money to a broker on trades that go south unexpectedly.
Using Leverage in Forex
Leverage in Forex (like leverage and any other investment opportunity) gives you tremendous potential to make mountains of money on trades that smaller amounts couldn’t have produced – though the risk is significantly larger, too.
As we highlighted a moment ago, it’s not uncommon for legitimate Forex brokers to offer leverage to their clients. The way the leverage works in the Forex world is almost identical to the way that trading on the margin in the stock market works, too.
The advantage here is that you can dramatically increase your profits if you’re able to trade with $100,000 versus trading with a $1000 deposit (using our example numbers above).
Obviously, a successful trade with $100,000 in currency is going to give you a whole lot more profit than a successful trade – the exact same successful trade – with just $1000 backing it.
On the flipside, though, a trade that goes south with $100,000 that you technically don’t have (money that you borrowed from your broker to execute the trade) is going to exponentially multiply your losses – sometimes to the point where you owe a lot of money to a broker.
It’s not really a question of can you owe money on Forex (you certainly can), but a question of how much margin you should take on to avoid these kinds of risks – and avoid having to owe money later down the line.
How Slippage Can Cause You to Owe Your Forex Broker Money
Something else that new traders need to understand in the world of Forex is the impact of slippage and how that can cause you to all money to your Forex broker.
Slippage is basically the difference between the expected pricing of a specific currency trade in the price that actually gets locked in when the trade itself is executed.
You might be dealing with a little bit of slippage every now and again depending on how quickly your broker locks in your trades, but most of that is negligible.
When trades are being executed during extremely volatile times in the Forex market, though – often when the potential for profit is highest – you’re going to see a lot more slippage as brokers try to fill orders as fast as possible.
Can Slippage Cause You To Owe Money To Your Forex Broker?
Slippage is very common, especially for lower time frame traders. Although a common issue, slippage can cause you to owe money to your broker – depending on how heavily leveraged you are.
You might end up trying to lock in a trade that looks like a real winner the moment you hit “execute” and slippage can come in, wipe that trade out completely, and instead lock you into a trade that has you owing money to your broker.
This is why you have to be really careful with the trades that you are considering, that you are only ever working with legitimate brokers you know you can trust, and that you are always executing your trades over internet connections that are lightning fast, stable, and reliable.
Do everything you can to mitigate slippage on your end and you (generally) won’t have too much to worry about.
Try not to trade when volatility is through the roof, either. All of the mitigation efforts on your end may not be enough to overcome the sheer amount of orders a Forex broker is handling in high volatility – and that might mean you end up with slippage issues that have you owing money to brokers when the trade finally executes.
I’d highly recommend avoiding the lower time frames like 1M or 5M charts, as slippage will most likely be a much bigger issue if you’re focusing mainly on these time frames. To avoid slippage even further, I’d recommend trading high volume currency pairs like EURUSD and GBPUSD.
In Conclusion- Can You Owe Money On Forex?
It’s important to understand that you can easily owe your forex broker money if you aren’t trading correctly. Your stop loss will be filled at or around the price you’re looking to get filled out – there is no guarantee that you’ll get that exact price.
To avoid owing your forex broker money, use lower leverage, use larger stop losses (in pips) and try to stick with the major currency pairs if possible.
To reiterate, you can owe your forex broker money because of slippage and the way that you’re executing your trades. Take care to understand how leverage dramatically changes the potential for profit and loss – it’s not just a matter of buying or selling at what appears to be a good price because there is always volatility in Forex trading.
Have you ever owed your forex broker money? Let me know in the comments down below.
