Many of the Forex starters wonder how the broker limits loss from higher leverages in case of negative trades. Here is a simple explanation about it:
- Say, you open an account with $100 USD and
- Say, you choose the leverage ratio as 1:100 which yields to $10,000 of tradable amount. (i.e., your actual money multiplied by the ratio of leverage, which in this example is $100*100= $10,000) and
- Say, you place a trade for $10,000 lot.
- At start of your trade your trade worth remains as $10,000
- If trade moves in unfavorable direction, you will see your Net account balance shown up as your opening balance minus respective loss amount.
- When your account balance reaches to the 10% of your opening balance your trade will be auto closed by your Forex broker (this is the most followed limit). At this point your loss would be $90.
- This way brokers protect users going to zero balance and avoids negative losses
