How Forex Traders Can Reduce the Risk of Bankruptcy
80 percent of forex day traders quit within two years of starting trading according to a study by academics from the University of California. Although a number of factors contribute to this high attrition rate, the loss of trading capital and the sudden closure of brokerage firms rank high among the causes of losses. In time these factors may force forex traders to file for bankruptcy. But there is a lot of forex traders can do to minimize the chances of losing money before they even start trading.
GET A REPUTABLE BROKER
It seems like a no brainer that forex traders need a reliable broker to succeed. Yet traders continue to lose money to broker bankruptcies. In fact, in just one day in 2015, one Swiss Brokerage went into bankruptcy and a number of others were left on the brink of bankruptcy. The fact that most brokers that fail are properly licensed in developed democratic countries adds to the conundrum. We remember the shocking demise of the likes of Alpari, Excel Markets, Refco, MF Global, and PFGBest. Usually, these forex brokers take millions of forex traders’ deposits down with them during the bankruptcy. In turn, some traders are forced to declare bankruptcy soon thereafter.
Your choice of a trading broker is therefore critical to your forex trading success in the long run. Avoid newer brokers that are offering unbelievably generous spreads and leverage. Countries like Switzerland, Spain, the U.S, and Germany may seem like stable jurisdictions with well regulated financial sectors. Yet the history of forex brokers and other financial institutions based in those countries that go under every year should make every forex trader think twice before hiring a broker based in those countries.
TRADING ON A LINE OF CREDIT
Trading using a line of credit may eliminate some of the risks in case your forex broker were to file for bankruptcy. You can start a line of credit by choosing a bank that both you and your forex broker can work with. Be warned that setting up such an arrangement is expensive and it usually takes time. In addition, many brokers set the minimum account balance for this type of account at $1,000,000.
The line of credit given by the bank is secured by your cash deposit. Then, you use a small percentage to fund your broker’s account leaving the lion’s share of the capital with the bank. The bank will then cover any losses you make using your deposits and you can move the profits from the brokerage to your bank account. In this case, the bank will swallow the losses in case the brokerage goes under.
FILING FOR BANKRUPTCY
Unfortunately, despite their best efforts to the contrary, some forex traders are sometimes faced with the difficult decision between soldiering on and declaring bankruptcy. Although many people shy away from bankruptcy because of certain popular misconceptions about its implications, filing for bankruptcy protection may give a measure of relief to a forex trader who is facing difficulties. In some countries, individuals are allowed to choose a subtle form of bankruptcy in which the person is allowed to keep most of his assets. In such an arrangement, a trustee is appointed to make sure that the trader’s repayment plan is based on his best efforts and is in good faith. In the most common form of bankruptcy, you may have to forfeit some of your assets. Even when you file for bankruptcy, however, you can still save some of your money. An experienced bankruptcy lawyer can help you to determine if bankruptcy is the right option for you to achieve the best possible outcome during the process.
Forex trading comes with a measure of risk as evidenced by the high attrition rate among new traders. However, you can reduce the risk of losing all your money. By choosing a reputable broker and trading using a line of credit, you can minimize the chances of losing money if your broker goes under. Getting a good lawyer to help with bankruptcy filings can also help traders to save money.