The term segregated account which new traders are certain to encounter when exploring the details of starting a retail Forex trading account, is another example of the financial industry jargon that is seemingly designed to make something basic appear exotic and complex.
List of brokers with segregated accounts coming soon…
The basic definition of the term is quite simple. All it means is that the funds you forward to your chosen broker to establish your margin account are separated from the operating accounts of the broker.
This is a desirable feature. You don’t want a broker using your funds to pay the electric bill, purchase expensive marketing materials or buy fuel for a corporate jet.
Unfortunately, for an account to be truly segregated would mean that it was held by the broker in your name only.
This is a technicality, to be sure, but one of which awareness should be maintained.
The account may be in your name, but if the broker does not have full access to your account, you lose the benefit of having your broker be able to automatically add funds to your account in the event of a margin call.
With regard to margin calls: don’t have them.
A margin call happens when trades there are experiencing a drawdown are losing so much money as to cause your broker to notify you that your losses are exceeding the limit your account permits. As sort of a safety feature for the trader, if additional funds are not immediately added to the account, the broker will automatically close your open positions.
Some brokers market this feature as a way to prevent losing trades from completely draining an account, but whether it is that or simply a desire on the part of the broker to not expend the effort of collecting funds from traders whose accounts have gone negative, the end result is the same: a margin called trader is out of the game.
The only reason to ever be subjected to a margin call is simply trading position sizes that are too great for the size of the account.
We apologize for that digression away from the topic of segregated accounts, but as a new trader, your first priority is to survive to trade again. The Forex graveyard is riddled with the corpses of traders whose intent it was to be heroes and home run hitters.
So, how much effort should you devote to finding a broker that offers a true segregated account?
In our opinion, none.
Current US law does not even allow for funds to be held in segregated accounts. It’s far better to have the regulatory weight, even if it is sometimes heavy-handed, of the world’s strongest economy backing your account.
Devote your time instead to finding a broker that has been around a long time and has the other features that make for a good broker/client fit, such as those we have described elsewhere.
A segregated account could be beneficial, if your broker goes bankrupt, in identifying and hopefully recovering your funds.
As with traders, a broker that has survived is far more valuable than the one that offers all kinds of bait to attract customers.
These good brokers have the financial resources to offer you the security of knowing that you’ll never log into your online account and find a blank page.
If you are outside the United States, and segregated accounts are an option, we still maintain that there are far more important factors to first consider when choosing a broker.
If all those factors are in place, consider a segregated account as one small additional measure of security.