Forex Stop Out: what is it?
When trading Forex or other CFD’s (Contract for Difference) on margin, it is essential to have an amount of money, the initial margin, in the account in order to open a leveraged position (more about leverage and how to use it, here). This amount of money needed to open the position is a fraction or percentage of the value of the underlying contract value.
The ratio between the trading account’s equity and margin is expressed as a percentage in the MT4 trading platform as margin level and is calculated as follows: Margin Level= Equity/ Margin * 100.
The Margin level is shown in the ‘Trade’ tab of the ‘Terminal’ window in the MT4 trading platform and it gives an indication of the available funds to open further positions.
When the margin level reaches 100%, the amount of funds in the account are running low and no new trades can be opened and this triggers a margin call as a warning to alert the investor they are close to losing all their capital. If no action is taken and the margin level continues to drop further, at a margin level of 50% a Stop Out will be initiated.
A Stop Out is the process of automatically liquidating open trades.
We use a Stop Out to prevent you from going into a negative balance. If the margin level displayed on the MT4 platform reaches 50%, then the system will automatically start closing trades from the least profitable one.
If your margin level is at or below the Stop Out level, few or all of your open positions will be closed as quickly as possible in order to protect you from incurring further losses.
It is worth mentioning that different brokers have different levels at which a Stop Out will be enacted, therefore, it is important to know what levels are used by your broker. A large amount of traders fail to check this, and just rush into opening their accounts. Here at StreamsFX, for all our trading accounts, the Stop-Out level is set at 50% and the Margin Call at 100%. Check the details of the Streamsfx accounts here
Some brokers may state in their trading conditions that their margin call is the same as their Forex stop out level. The unpleasant implication of this can be that no warnings are given in advance of your positions being closed once you reach this level.
How to Avoid a Stop Out in Forex Trading
If you want to avoid any problematic outcomes, you need to take some steps to prevent stop outs. Generally, it is all about appropriate trade management, however, there are some useful tips for you to follow.
The first one is not to open too many positions in the market simultaneously. Why? Because more orders mean that more equity is used up to sustain a trade, so you leave less equity as free margin, in order to avoid margin call and the stop out level in Forex.
Additionally, if your current trade is highly unprofitable, you need to consider whether there is any sense in keeping it open. It might be better to close it while you still have some funds in your account, otherwise, it might be closed automatically by the system when your margin level reaches 50%.
Keeping an eye on your account at all times, it’s vital. If you find yourself in a situation where you might be issued a margin call before your trades being closed automatically, you may choose to add funds to your trading account in order to avoid a Stop Out.
However, always remember that you should only trade with money that you could afford to lose. Only use leverage if it seems rational for you to do so.
If you are new to Forex trading, you could benefit from more practice. Using demo accounts could help you test your strategies until you feel comfortable to direct your attention to live trading. With StreamsFX you can open a demo account straight from the Clientzone.
StreamsFX is a CySEC regulated Forex and CFD broker, dedicated to offer our clients access to a secure, reliable and transparent environment backed by our customer-centric team of experts. Start trading today!
StreamsFX offers Negative Balance Protection to ensure that our clients do not lose more money than they put in.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.