A Forex stop-out is when all of a trader's active positions in the foreign exchange market are automatically closed by their broker.
The Stop Out Level is similar to the Margin Call Level, which was covered in the previous lesson, only that its much worse!, Stop Out Level occurs when your Margin Level falls to a specific percentage (%) level in which one or all of your open positions are closed automatically (“liquidated”) by your broker which means you're at risk. It happens because the trading account can no longer support the open positions due to a lack of margin.
More explicitly, the Stop Out Level is when the Equity is less than a specific percentage of your Used Margin. When this level is attained, your broker will automatically start closing out your trades starting with the most unprofitable one until your Margin Level is back above the Stop Out Level.
But when your Margin Level is at or below the Stop Out Level, the broker will close any or all of your open positions as quickly as possible so that to protect you from possibly incurring further losses. This act of closing your positions is called a Stop Out.
But remember that Keep, a Stop-Out is not something that a trader can precisely wish to control. The moment the liquidation process has started, it is then most not possible to stop it since the process is automated by the broker. Even your broker customers team will not certainly be able to help you apart from sending you the notification via phone when such situations happen. Stop Out is also known as margin closeout value, Liquidation Margin, or Minimum Required Margin.
Example: Stop Out Level at 20%
Suppose your forex broker has a Stop Out Level at 20%. Which means that your trading platform will automatically close your position if your Margin Level reaches 20%.
Stop Out Level = Margin Level @ 20%
Lets proceed with the example from the previous lesson, where we explained What is a Margin Call Level.
There, we have finally realized that you're trapped and have already received a Margin Call when the Margin Level had reached 100% but still decide not to deposit more funds because you think the market will turn. But this your newbie thought confirmed also how crazy you're are! By expecting The market to recover, but unfortunately your sucky crazy self ends up wrong as the market continues to fall.
Youre now down 960 pips.
At $1/pip, you now have a floating loss of $960!
Which means your Equity is now $40.
Equity = Balance + Floating P/L
$40 = $1000 - $960
Your Margin Level is now 20%.
Margin Level = (Equity / Used Margin) x 100%
20% = ($40 / $200) x 100%
Used Margin can‘t go below $200 because that’s the Required Margin that was needed to open the position in the first place.
At this point, your position will be automatically closed (“liquidated”).
When your position is closed, the Used Margin that was “locked up” will be released and it will then become a free margin. Eventually you will become worried!
Your floating loss of $960 will be “realized”, and your new Balance will be $40!. Since you dont have any open trades, your Equity and Free Margin will also be $40.
Heres how your account metrics would look like in your trading platform at each Margin Level threshold:
When ever you experience a Stop Out and see the aftermath in your account, this is how your eyes fee.
When you had multiple positions open, your broker usually closes the least profitable position first. Each position that is closed “releases” Used Margin, which increases your Margin Level.
In the case where you realized closing this position is still not enough to get back the Margin Level above 20%, then your broker will continue to close positions until it does. The Stop Out Level is meant to protect you from losing more money than you have deposited.
If your trade continued to deep causing you losing, eventually, you‘d have no more money in your account and you’d end up with a negative account balance!. Most of the time Brokers would prefer not to have to come knocking on your door with a baseball bat to collect the unpaid balance, so that is why Stop Out is meant, to try and stop your Balance from going negative.
What if I have multiple positions open？
The above given example covered only the scenario with you trading a single position. But what if you had multiple positions open？ Huh...let's see what happens. Sounds like you love gambling so heres an example of how the changes in the trades process would work if you had two or more positions open.
Also note that, Each broker has its own specific liquidation process so be sure to check with yours. But this is a common approach and will at least give you a good idea of what kind of horror you might experience if youre trading too large.
Lets assume the Stop Out level is at 100%. If at any point, the Margin Level drops below 100% of the margin required you will experience an Auto liquidation of the position that has the largest unrealized loss.
So if you have multiple positions, the open position with the greatest unrealized loss is closed first, followed by the next largest losing position, followed by the next largest losing position, continuously, untill the Margin Level (maintenance margin) is back to 100% or higher.
Depending on the size and unrealized P&L of the open positions, all your open positions could be liquidated in order to meet the margin requirement!. Burt remember, only you alone, are responsible for monitoring your account and making sure you are maintaining the expected margin at all times to support your open positions.
And I believed you have been warned throughout this lesson to take care. Dont be crying begging to your broker when your position gets auto-liquated and sucked. Although you can still cry for the loss....but that doesn't concern your broker at all.
So far, Now that we‘ve covered all the important metrics that you suppose to know in your trading platform, let’s take everything youve learned so far about margin trading and use it all together using different trading scenarios.
