Forex Academy:
Primary School
5 minutes
Lesson 8
How to protect your capital
- When the price drops, do you immediately lose money?
- Can your capital go negative?
- What should you do to avoid Automatic Stop Loss?
After buying a currency pair, when the price drops, do you immediately lose money?
In Forex, if you have not yet sold the currency pair that you bought, you have not incurred a loss yet!
You just need to wait until the price rises again, and you still have a chance to make a profit.
Let’s clarify the meaning with an example where you have an account balance of 1,000,000 VND.
1. When USD/VND = 22,600, Mr. Giau bought 3,000 USD.
2. When USD/VND = 22,500. The price has decreased!
If you sell 3,000 USD now, you will incur a loss of 300,000 VND (67,800,000 VND – 67,500,000 VND).
So, at this point, Mr. Giau will not sell the 3,000 USD.
This 300,000 VND is the “Unrealized Profit/Loss,” meaning it is not yet a realized loss.
3. When USD/VND = 22,700. The price has increased!
Mr. Giau has sold 3,000 USD and made a profit of 300,000 VND (68,100,000 VND – 67,800,000 VND).
After he sells the 3,000 USD that he bought, the profit will be calculated and reflected in his trading account. balance.
You have the freedom to decide the timing of your purchases and sales.
Can your capital go negative?
Don’t worry!
There is a mechanism called “Automatic Stop Loss” that prevents your trading account balance from going negative.
When the “Automatic Stop Loss” is triggered,
all your open trade orders will be automatically closed.
I will explain this in detail with an example below!
When the account balance = 100 USD and the EUR/USD price = 1.14000, I buy 0.01 lot of EUR/USD.
After using 3.8 USD as margin, the remaining usable amount is 100 – 3.8 = 96.2 USD
2. When the EUR/USD price = 1.10000. The price has decreased!
At this moment, the unrealized loss is 1.140 – 1.100 = 40 USD.
3. When the EUR/USD price = 1.04380. The price has decreased even more!
At this moment, the unrealized loss is 1,140.00 – 1,043.8 = 96.20 USD.
The available usable amount has been depleted! The Automatic Stop Loss will be triggered!
The purpose of the Automatic Stop Loss
To prevent your account from losing the entire margin used, the open orders will be automatically closed.
4. The Automatic Stop Loss is triggered. The open orders will be automatically closed.
The loss will be realized and reflected in the trading account balance. The current balance is 100 – 96.2 = 3.8 USD.
If there were no “Automatic Stop Loss” mechanism, your account balance could go negative, so this is a very useful mechanism!
When you have multiple open orders at the same time or when you trade with large volumes, the Automatic Stop Loss can be easily triggered.
Case 1: When the account balance is 100 USD and EUR/USD price: 1.140000, you buy 0.15 lots of EUR/USD:
The margin used will be 1.14000 x 15,000/300 = 57 USD
Case 2. When the account balance is 100 USD and the EUR/USD price = 1.140000, you place 15 buy orders of 0.01 lot of EUR/USD:
The margin used will be (1.14000 x 1,000 currency units / 300) x 15 times = 57 USD.
In both cases 1 and 2, since the available margin left is small, even a small price drop can easily trigger the Automatic Stop Loss!!
What should you do to avoid automatic Stop Loss?
When your available margin is low, the Automatic Stop Loss can be triggered easily.
Therefore, we recommend to avoid trading with excessively large lot sizes.
If your account balance is 50 USD, trade safely by limiting orders to 0.01 lot per trade, with a maximum of 3 trading orders. If you intend to trade larger volumes, consider depositing more funds into your trading account to increase your trading capital.
You can monitor the conditions that trigger the Automatic Stop Loss in MetaTrader 4:
Moreover, the monitor method is very simple!!
On your computer:
Kindly check the Margin level displayed at the bottom of the Terminal window in your trading platform.
If you are using a mobile phone:
You can check the Margin level on the “Trade” screen
-If the Margin Level is at or above 300%, it shows you can trade safely.
-If the Margin Level is at 150%, you need to closely monitor price movements or additional deposits are recommended.
-If the Margin Level is at or below 110%, a critical warning,
Before the potential Automatic Stop Loss activation, close your open orders or deposit more funds to increase the Margin Level!
The lesson on “How to Protect Your Capital” ends here!
Let’s check to see if you understand the lesson!
The “Primary School” level lesson series ends here!
We will guide you further about practical trading and profit generation in the “Middle School” level lesson series. Please continue to follow.
If you have any questions, please contact us.