What Is A Stop-out Level In Forex And How Does It Work?
There are different types of trading styles that traders follow in forex trading, one of which is called ‘margin trading’. This type of trading includes existing and locked-up funds, with the former being called the available equity and the latter being called the used margin. The difference between the two is known as ‘Margin Level. As a trader, you should not allow your trade to go below 100% and by chance, if you do, your broker will trigger a margin call, which is a type of warning to refill your account balance or close a few positions until your account balance is restored.
This is called the margin call level. If you ignore the margin call and the margin level falls below a certain point, then the ‘stop out level’ begins. At this point, your broker is going to close the open positions automatically, which is mostly the ineffective ones. This process is called ‘stop out’.
Stop-out occurs in forex trading when the existing position goes against you, which means you’ll lose money, causing the available equity to slowly reduce. So, when the margin level gets to 50%, your broker starts closing the positions automatically until the previous level is restored.
Different brokers offer different margin call and stop out levels, but an optimum margin call/stop out level would be around 70%/50%. Here are some brokers that offer the same percentage:
Broker Margin Call/Stop Out Level
Coinexx 70% / 50%
LQDFX 50% / 30%
Pax Forex 10% / 5%
Turnkey Forex 70% / 50%
JustForex 40% / 20%
Weltrade 20% / 10%
EagleFX 100% / 70%
FXGiant 80% / 20%
FXGlory 60% / 30%
Finprotrading 70% / 50%
What does stop out level mean?
If you use margin to leverage a large trading position, then it can have many consequences, which include;
- Get bigger profits
- Rach ‘maintenance margin’ level where it won’t be possible to open new positions
- Go below maintenance margin (margin call level)
- Go below margin call level (stop out level)
What happens when the margin level goes below 100%
Ideally, you should maintain the margin level above 100%, but it is not always possible to do so. In case, the open positions are not successful and you are suffering from losses, then your account balance, the equity available in it will start to decline. This will lead to a reduction in the margin level as well.
When the level reaches 100%, your broker will trigger a margin call to warn you that you should close some positions until the margin level goes above 100% again. When your broker is able to decide to close your positions is called the margin call level. However, your broker would still wait for you to refill your account balance instead of liquidating your positions right away.
What is the stop-out level that you want to avoid?
If your trading position continues to go down, a new stage will begin. If the margin level falls below 50%, then the ‘stop-out level’ will start.
A stop-out is a situation when your positions are closed automatically because the available equity in the balance is not enough to maintain even the existing position, let alone open new ones.
In this case, the broker will keep liquidating the trades until the stop-out level stops and the margin call level occurs. The broker does this because if the trade continues to go in losses, then it will finally lead the trader to a ‘negative account balance’ where there won’t be more losses to the account than the funds available in it.
In margin trading, if everything goes to plan, then you can win big, but there is a flip side to the story as well. If your trade doesn’t go as planned and you start getting losses, then the margin level can easily fall below 100%. In case, it hits 50%, the broker will close your positions automatically until the margin level rises above that point. This will be called stop-out in forex and the level at which it starts is called stop-out level. As a forex trader, you should be very careful while doing margin trading because you are not supposed to reach the stop-out level. But, it has a positive aspect as well, i.e., it saves you from reaching a negative account balance so that you don’t suffer more than what you actually have in your trading account.
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