what is stop out level in forex?

How do you define "Stop Out Level" or "Stop Out"? The Margin Call Level from the previous lesson is comparable to the Stop Out Level, but the Stop Out Level is considerably worse!

August 05, 2022 - 03:32 PM 559 views

what is stop out level in forex

Educational Articles

© what is stop out level in forex

Free Enquiry Now

How do you define "Stop Out Level" or "Stop Out"?

The Margin Call Level from the previous lesson is comparable to the Stop Out Level, but the Stop Out Level is considerably worse!

A stop out level in forex trading is the point at which one or all of your open positions are automatically stopped ("liquidated") by your broker when your margin level drops to a particular percentage (percent) level.

This liquidation takes place as a result of the trading account's inability to fund the open positions due to a margin shortage.

The Stop Out Level, in more precise terms, is reached when the Equity is lower than a certain portion of your Used Margin.

Once your margin level drops below the stop out level, your broker will automatically begin closing out your transactions, starting with the least profitable one. This process will continue until your margin level rises again.


The broker will swiftly liquidate any or all of your open positions if your margin level is at or below the stop out level in order to shield you from potential future losses.

A stop out is when you close all of your positions.

Remember that a Stop Out is not a decision. Since the liquidation process is computerized, once it has begun it is typically impossible to stop.

The customer service staff of your broker won't likely be able to assist you beyond simply listening to you sob loudly on the phone.

For instance: Stop Out Level at 20%

Suppose your forex broker has set the Stop Out Level at 20%.

This means that if your margin level rises to 20%, your trading platform will automatically close your position.

Stop Out Level = Margin Level @ 20%

Let's continue using the what is a Margin Call Level example from the prior lecture.


You already received a margin call when the margin level reached 100%, but you opt not to add extra money to your deposit since you anticipate a market reversal.

The market is still declining.

You are now 960 pip in loss.

You currently have a floating loss of $960 at $1/pip.

Your Equity is now $40 as a result.

Equity = Balance + Floating P/L

$40 = $1000 - $960

Your margin level is currently 20%.

Margin Level = (Equity / Used Margin) x 100%

20% = ($40 / $200) x 100%

Because $200 was the Required Margin required to open the position, the Used Margin cannot fall below that amount.

Your position will now be automatically closed (or "liquidated") at this time.

The Used Margin that was "locked up" will be released after your position is closed.

It'll turn into Free Margin.

However, the outcome will be disappointing for you.

Your $960 floating loss will be "realised," bringing your new Balance down to $40.

As a result of the lack of any open deals, your equity and free margin are both $40.


Here are the account metrics that would appear in your trading platform at each threshold for the margin level:

 

Margin Level

Equity

Used Margin

Free Margin

Balance

Floating P/L

Margin Call Level

100%

$200

$200

$0

$1,000

-$800

Stop Out Level

20%

$40

$200

$0

$1,000

-$960

Stop Out (Liquidation)

-

$40

-

$40

$40

-

The broker often terminates the trade that was the least profitable first if you have many positions open.

Used Margin is "released" with each trade that is closed, raising your margin level.

However, if terminating this trade doesn't raise the Margin Level above 20%, your broker will keep closing positions until it does.

You should not lose more money than you have placed thanks to the Stop Out Level.

If your trade kept losing, soon you wouldn't have any money left in your account and it would have a negative balance.

What if I Have Several Roles Available?

The case where you were trading a single position was covered in the example above. However, what if you had several roles available?

Considering that every broker has a unique liquidation procedure, be sure to verify with yours.

However, this method is widely used and will at least give you a good indication of the terror you can encounter if you're selling too much.

Assume that the Stop Out level is set to 100%.

You will experience an AUTO LIQUIDATION of the position with the highest unrealized loss if the margin level ever falls below 100% of the required margin!

In the event that you have numerous open positions, the one with the largest unrealized loss is closed first, then the next largest losing position, and so on, UNTIL the Margin Level (Maintenance Margin) is back at 100% or above.

Your open positions might all need to be closed in order to achieve the margin requirement, depending on their size and unrealized P&L.

Keep in mind that YOU, and YOU alone, are in charge of keeping an eye on your account and ensuring that you are always preserving the necessary margin to fund your open positions.

Let's take what you've learned so far about margin trading and put it all together Utilising various trading scenarios now that we've covered all the crucial metrics you need to understand in your trading platform.

Share With -

 

No comments yet for this post

Please Login to comment this article.

If not a registered user yet, Please signup here