Losing more than starting capital

[nickohorny]

Hello, this is a real basic noob question.. but please could someone explain how more money can be lost that your initial capital in trading?

If I was to open an account with say,. mirus futures, and deposit an account with $5000. With $500 needed for intra-day trading margin to trade 1 contract - how could I lose more than I actually deposited?

As as a newb this is the scariest thing I see around, "lose more than you can imagine etc"

If I am negative in my account, say down 4,000 and just have $1000 left only, how does it work? would the broker immediately shut my account as soon as it gets to $500? how can they take more off me than is already lost?

Thanks for such basic question help but its all things needed anwering as I am in a long haul learning process and only just figuring out margin etc. :smart:

 

[N Rothschild]

if the market gaps down and the price you get out is at a loss far greater than the fund in your account, you will end up owing the broker alot of money! has happened to be before.

 

[MrGecko]

the value of an SP500 contract is currently $53,250 (price in ticks x value per tick) - that is how much you would lose if you went long and the SPX went to zero with no stops. If you used leverage, you could lose more.

Additionally, you could go Short with a margin of $53,250 - but if the SPX rose my more than 100% then again you would have lost more than your base capital.

 

[N Rothschild]

no as you would be margin called and closed out. only way it can happen is if market gaps.

 

[nickohorny]

Thanks...Right, think I get u, let me give an example of market i know of -

ok let's say I am simply trading just intraday - on emini s&p 500, which is $12.50 per tick move. And I trade 1 contract a day, with say a strategy of risking 8 tick stop for 8 tick profit. My initial capital deposit is $5,000...

How can I lose more than in my account? I would not be holding any overnight positions ever so the gap down/or could not happen to me right? would all be flattened intraday. My stops would always be used in my strategy too.

So If I had a losing day I would say lose $100 only... correct? no more? And needed is $500 per contract as margin, so if ever my account went below $500 it would be closed correct? No more money ever owed?

 

[MrGecko]

no as you would be margin called and closed out. only way it can happen is if market gaps.

Yes of course, my bad.

 

[MrGecko]

Thanks...Right, think I get u, let me give an example of market i know of -

ok let's say I am simply trading just intraday - on emini s&p 500, which is $12.50 per tick move. And I trade 1 contract a day, with say a strategy of risking 8 tick stop for 8 tick profit. My initial capital deposit is $5,000...

How can I lose more than in my account? I would not be holding any overnight positions ever so the gap down/or could not happen to me right? would all be flattened intraday. My stops would always be used in my strategy too.

So If I had a losing day I would say lose $100 only... correct? no more? And needed is $500 per contract as margin, so if ever my account went below $500 it would be closed correct? No more money ever owed?

In practical terms you are pretty much right, but the possibility exists of you getting "gapped" intra day too, although it is rare if you avoid the obvious times (to avoid).

EDIT: For example, say you are long at 100 with a top at 92. The market can move from 95 to 90 without 94's, 93's, 92's or 91's trading at all.

 

[shakespeare515]

Yes, can only happen if market gaps, and if you trade forex like i do, then you dont have to worry about that unless you are holding positions over weekends, or are too heavily leveraged while trading an extremely volatile news release such as nonfarm payroll.

...good trades,
sa

 

[nickohorny]

Hi - I am back, been on holiday...

Sorry but I have to question the gap scenario intra-day please... Gecko, your example regarding going 'over' over my stop and cutting out the 92 level completely and then trading lower - what would essentially happen then if it blew past this stop? the stop just does not become effective? and if market kept moving lower and lower... eg/ all way down 15 points or so.. I am now down 15 points?!? So If I was up and away from the pc and left my trade running and this happened, I would seriously be down all these points purely because price went over my stop at 92? wow that is scary..

One last thing, if the above happened as an example, and the trade was left running and I was away from my desk, would my broker not just STOP me out at some point as the market continues lower? and thus my account can no longer sustain the amount lost? let's say I had enough to last say 30 points only in my account, and the market gapped below my stop as explained and kept going lower to -30 points, surely my broker would 'cut' it off there no? Knowing I can no longer sustain any more loss?

Thanks for the help, just really want to be sure that one day when I do go for it I am certain I will not lose more than I began with.. really is my scariest though at the moment!

 

[MrGecko]

Your stop order will be one of two types: Limit or Market

If your stop is, say, STOP LMT 92, your broker will enter an offer at 92 on your behalf, and won't move it. If the best offer is 91, 90 or 40, you won't get filled and are sill long.

If your stop is, say, STOP MKT 92, then when 92 or below trades, your broker will execute a market order to get you out of your position, who knows what price you will get.

NB: If in scenario 1, the losses on your position exceed the margin requirement your broker should ask for money / close you out anyway, but have to say I don't know if they will do this intraday.