Notional funding is an arrangement sometimes used in managed Forex accounts in which the account is traded as if it were larger than the cash actually deposited. Understanding it requires separating two numbers that are easy to confuse. This article is educational only; it is not investment advice, and nothing here is a recommendation of any funding arrangement.
The first number is the actual funds: the cash the investor has deposited in the account. The second is the nominal, or notional, account size: the level at which the investor and manager have agreed the account will be traded, as set out in their agreements. When the nominal size exceeds the actual funds, the difference is the notional portion, and the essential point is that the notional portion is not cash. It is an agreed trading level, not money sitting in the account.
That difference changes how gains and losses feel. Position sizes in a notionally funded account are typically based on the nominal size, while gains and losses land on the smaller base of actual cash. Trading a nominal size larger than the deposited cash therefore raises the effective leverage on that cash, and leverage amplifies both gains and losses. A percentage move that would be modest relative to the nominal size can be a much larger percentage of the actual funds.
Funding needs are also not fixed. Brokers require margin, deposited value held to support open positions, and what an account must post can change. If a broker changes its margin requirements, whether for its own reasons or in response to capital or regulatory changes, an account holding the same positions may need more cash to support them. Trading losses reduce actual funds, which can also prompt a request for additional cash if the account is to keep trading at the agreed level, and depending on the account’s terms, losses can exceed the amount deposited.
None of this is knowable from the label alone. How a notional arrangement works in a specific account, including the agreed trading level, the margin terms, and what happens when actual funds decline, is defined by the exact account and management agreements and by the written risk disclosures that accompany them. Reading those documents before funding, and asking about anything unclear, is the ordinary starting point.
Whether any funding arrangement fits a particular portfolio is a judgment each investor must make independently, ideally with a qualified professional. Trading foreign exchange involves substantial risk of loss and is not suitable for every investor.
Related articles on this site cover the Forex market, managed accounts and hedge funds, correlation, and how to evaluate a manager’s track record.
The trouble with Forex track records is that they are challenging to verify. One easy way to confirm a track record is by giving it a “common sense” audit. Ask yourself these two simple questions: