When we hear about margin trading it seems like something that will be beneficial as it gives us more trading power than what our capital allows for. But these benefits come with some risks that we need to take into consideration when we decide to use leverage.
The higher leverage you use, the less margin you are using to secure positions. Among many important parts of understanding margin trading is the stop out level and the way it can affect your trading activity.
To put it simply, “stop out” in Forex is basically a liquidation of your whole account automatically by the broker. This happens when your account, as a result of leveraged trading, can no longer support the open positions. In most cases, it is impossible to cancel the stop out, as the process is fully automated.
Stop out can be simply explained as the process of automatically closing a trader's positions when the balance of his/her account reaches a certain level. This is prominent in margin trading when an investor is using leverage. Trading on margin can have different types of impacts on individual traders.
First of all, it can increase the profits made by traders. On the other hand, it can also be quite risky. Apart from the possibility of increased losses, margin trading is also associated with two common occurrences in the market; namely, margin calls and stop outs.
When a trader has multiple active positions open in the market, some of which are registering losses, it is normal for the account balance to fall. When trading on leverage, individuals are required to meet a certain margin level.
When such a level is not met, the broker activates something called a margin call. This is a process by which the broker requires traders to make payments in order to once again reach the minimum level and keep their position open. If the trader does not meet this requirement in a timely fashion then the broker starts selling the positions. But, in some cases, brokers decide to not sell the assets of their clients and wait for them to make additional payments, which is referred to as a margin call.
If the trader does not add additional funds to their account, things can go from bad to worse fast. Once the margin reaches a certain level, which is different for all brokers, the margin stop out will automatically be triggered. There is no going back at this point and all the open positions will be liquidated automatically until the margin level is recovered.
The stop out in Forex is directly connected to leverage and margin trading. It is very important for traders to understand the risks of leverage before they decide to use it. One of these risks is the stop out.
Leverage can be a very helpful thing for traders, as it can provide individuals with additional funds for trading. Meaning, traders in Forex are not required to pay for the entire position. As such they are able to open a larger position than what their capital allows for while the remaining costs can be covered by the broker, thanks to leverage.
Let's look at an example. Say that you are using leverage of 1:100, this means that to open a position worth 1 lot ($100,000) you will be required to only use $1,000 from your account. But, while it can increase your profits, it can also have the same effects on your losses.
Because of this, it is very important for traders to understand all the drawbacks of using leverage when trading. This way, they can ensure that they are ready to face whatever might come their way.
To better understand the meaning of stop out in FX trading, it is important to discuss specific examples. Let's say that you are trading the EUR/USD currency pair, with leverage of 1:20. If you open a position for 100,000 Euros, it means that the equity you had to put up for opening this position is 5,000 euros.
Once your equity falls to 2,500 Euros, which represents 50 percent of your used margin, the broker will issue a margin call warning.
This means that you will have one of two choices: either add some funds to your account or sell some of your assets. If you fail to do so, the broker will be forced to sell your assets on its own. However, in some cases, brokers do not do this and they simply wait for the traders to make their decision.
While some might think that this is a good thing, it might actually turn against the traders. If the market continues to move against your positions, you will end up losing more money.
This will cause your account balance to continue falling. Once it meets a certain price point, which is called the stop out level, the stop out will be automatically activated. After this, there is nothing you can do. This is a fully automated process for most brokers today.
Even if you contact the customer support team, they won’t be able to help you. The only thing left is to watch your positions being liquidated. However, keep in mind that it can also depend on your broker, as mentioned above.
Understanding the difference between a stop out level and a margin call is very important. While these two are very similar to one another, there are some distinct differences between them. Simply put, stop out is basically the worst scenario of the margin call.
A margin call is activated when your equity reaches a specific percentage. The main idea behind this is to ensure traders do not lose more money than they have in their accounts. It happens only when traders are using leverage for their positions.
In most cases, traders have the opportunity to decide what is best for them to do. Either deposit additional funds in their accounts or sell some of their assets.
On the other hand, stop out is basically a point of no return. All you are able to do is sit back and watch the process take place. Quickly reacting to margin calls can be a way for traders to avoid having to deal with the dreaded stop out.
So a very important thing to remember is that if traders do not respond to the margin call, they are in danger of facing a stop out.
In most cases, there is no need to calculate the stop out level on your own. The majority of brokers in the market today will do this for you. However, it is still good to know what a stop out is and how to calculate it.
Stop out is basically a required margin level which is expressed using percentages. There are many ways one could calculate the stop out level, one of them is using special calculators.
In Forex, the stop out level calculator requires traders to provide information such as the account currency, equity, currency pair, buy/sell price, and the volume position in lots. After providing this information, the calculators are able to provide information such as the current price, distance to the stop out level, the price of stop out, and the potential loss your positions can end up in.
Using such tools can further help traders to be ready for the worst. While the stop out level varies from broker to broker, it is very common for the majority of brokers to have it somewhere around 20 percent.
Now that we have learned what a stop out level is in Forex, let’s find out how one could avoid it.
Stop out is a very scary thing that many traders are afraid of. It is only natural to be looking for ways to avoid having to deal with it. There are several different ways one could avoid suffering from a stop out. The easiest way of doing so is to ensure that you have a good risk management strategy.
This can be done by employing smart orders such as stop losses, which are used by traders to set specific levels to automatically close the position if the market starts to go against their trade. This way, they can ensure not to lose more money than they can afford.
Another way to avoid dealing with stop out levels is to ensure that you do not have many positions open at the same time. The more orders you open, the more equity is being used. This leaves you with a higher chance for your account to get near the stop out level.
Another very important thing that can help you to avoid dealing with Forex stop out is to ensure that you react quickly and accurately on the margin call. You should understand that not responding to the margin call can lead to a stop out, and you will end up losing all of your positions.
Stop out can be a very dangerous thing for traders. Because of this, individual traders should ensure that they are ready for unfavorable market conditions and a situation that can very easily turn against them. If you do not have a well-developed risk management strategy, the dangers are even higher for you.
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If your position was stopped because of a stop out, it means that your margin has reached the stop out level. It is an automated process performed by Forex brokers to protect their clients from a negative balance.
Stop out in Forex can be viewed as a pre-defined point of the margin level, where traders' positions are closed to avoid further losses. The margin level at which the positions are closed differs for every broker. In most cases, it is somewhere around 20 percent.
When your account margin level reaches 100 percent, you will not be able to open any new positions anymore. The only thing you can do is close your existing positions. A margin call means that your equity is equal to or is lower than the used margin. This happens in the Forex trading market when the positions you have opened in the market are resulting in high losses.
If your account continues to record losses, it might hit the stop out level. Stop out in Forex means that the broker automatically closes all of your open positions.
The best way to calculate stop out is to use a stop out level calculator. There are different types of this kind of calculator available in the market, and they provide traders with different types of information that can be very beneficial for avoiding the stop out level.
But, it is not necessary to calculate the stop out level on your own. In most cases, the broker will provide you with detailed information about the stop out level.
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