Can you lose everything?

Risk is inherent in any investment, so many ask themselves, "Can I lose my entire deposit?" The foreign exchange market is generally perceived as one of the riskier capital markets due to the high volatility and the available financial leverage. However, it is not exactly like that, because the investor himself is risky. Unconsciously, he may make ill-considered and irrational decisions that have negative consequences. Taking into account that the investor is experienced and knows the mechanisms prevailing in the capital markets, it turns out that Forex is as risky as any other.

Can you lose everything (all deposit paid)?

Yes. You can even create an overdraft that will eventually have to be repaid (although this is more specifically regulated by the contract with broker with whom we have an invoice). If we play aggressively, opening great positions using a large jackpot and most of our deposit, it causes that small price changes significantly affect the state of our account. Many major currency pairs are quite volatile. In addition, markets' reaction to macro data releases, central bank interventions and possible price gaps arising at the opening on Sunday. All this, combined with an open large position, can result in a very fast loss of capital. Often, the loss of the whole or even the entry of the account balance to a minus.

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However, there is nothing surprising. It is the same with the futures market or even normal business. As a result of bad decisions and indebtedness with banks, it is not enough that you can lose everything, we will ultimately remain with an overdraft.

In this case, should the market and the whole world be blamed, or should one look at oneself and analyze errors?

Of course, it may happen that as a result of a series of unfortunate accidents, we will ultimately suffer the most. However, this is also an element of market risk that we should be aware of and try to protect ourselves against.

Security mechanisms

• Stop Loss - the most popular type of loss reduction, where the SL order will close our trades at a given loss threshold on the position. Unfortunately, it will not work in the event of a price gap. With a very dynamic exchange rate change, a price slippage may occur, which will ultimately end our position with a loss greater than planned.

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• Margin Call - this is a mechanism built into the broker's platform. When the deposit drops to a certain value in relation to the capital used, it will warn us against clearing the account. At the same time, it will prevent the opening of further positions until the situation improves or we replenish our deposit.
• Stop-out - similar to the above, it is a mechanism on the trading platform and a Margin Call sequel. If the loss deepens, the most losing or all open positions will be closed, leaving only the remainder of the deposit in our account. The level at which it activates Margin Call and Stop-out, are determined individually by each broker for their clients.
• Supporting tools - for additional protection against overdraft, various machines can be used, which will close our transactions at the indicated loss threshold. Such options have, for example, Smart Orders or Security EA. Unfortunately, in order for them to work, the platform must be on all the time, and here, too, as in the case of SL, they can occur slides and gaps that will limit the speed of response.

Variability

It is worth paying attention to the volatility of currency pairs on which we play and take into account the scale of price fluctuations in the selection of the transaction volume. The rational volume of exchange rate movements will certainly have a positive impact on risk reduction.