Stop Out Level in Forex
Forex traders dread to stop out levels in trades. This trade situation is avoided by many traders, however, some traders don’t understand how this works. New traders wonder what is stop out level in Forex is. In this article, stop out level in Forex trading will be explained in detail, and also we will look at how to use the stop out calculator, and some examples.
Traders indulge in margin trading because margin trading enables a trader to trade on leverage. In margin trading, the ratio between the currently available capital and the used margin is referred to as the margin level. The margin level hitting 50% results in the broker closing open trades. This is done until the previous level is attained.
Traders ensure not to go below the 100% margin level. A margin call is initiated by the broker once a trader goes below the 100% margin level. This margin call is a broker’s order to close some open trades or refill account balance to achieve a 100% margin level.
A stop-out becomes effective when the margin level reduces to a 50% level. When a trader opens trade positions on margin, the trade goes sideways. Automatically that’s a loss, and the required margin is deducted from the trader’s account. Also, when a trader opens a different trade in the margin, and the trade keeps going sideways, the trader is required to refill his account balance to make up for the margin level. If the trader does not do so, and the margin reduces to 50%, the broker automatically begins to close down open trades.
What is Stop Out Level in Forex?
A stop-out level in forex trading is the action of a broker closing down all the trader’s open forex trading accounts. This is due to the trader’s inability to meet up with the required margin level.
When the margin level of a trader declines, it means the trader can not sustain their open trades with the locked margin. Thus, the broker closes the trader’s open trades. However, this stop-out level differs, it all depends on the broker being used.
A stop out is an automatic action, it is not optional, and can not be reversed once initiated. However, this action can be avoided, and oftentimes than not, traders tend to avoid stop-out levels.
When traders use margin levels higher than their trading positions, it results in different impacts, which include:
Increases traders’ payouts earned from big positions.
Attain the required margin level that prohibits the opening of new trades.
Maybe below the margin maintenance level
Move below the margin call level (stop out level).
Since the importance of trading with leverage and margin has been established, we will move on to broadly explain stop-out levels.
Let’s take a look at the effect of trading below the 100% margin level, and how the stop out level is triggered.
When the Margin Level goes below 100%
Traders are advised to retain a margin level of 100%. Traders will be able to open more reading positions with a 100% margin level. This is the required margin level for most forex brokers. However, in a case where the open trades are going sideways, and traders are registering losses instead of gains – the present capital in the trader’s account starts to decline. Thereby, also resulting in a reduced margin level.
Normally, when the level of the Margin hits 100%, the Forex broker begins a margin call. This margin call means the broker instructs the trader to refill the account balance or exit some trades, to meet up with the required margin level.
However, traders’ failure to refill account balance leads to the automatic closing of the open position by the broker.
Simply put, the margin call level is the level where a broker decides if to close a trader’s open trades or not. However, most times brokers prefer not to liquidate the open positions, but rather wait for traders to refill the account balance.
What Stop Out Level should Forex Traders avoid?
As earlier stated, a stop out level in forex is the act of automatically closing down open trades. This is due to the unavailability of capital required to keep trades open. The margin level has gone below the required margin level, and trades can’t be maintained.
When a trading position continues to generate more losses, it leads to low margin levels. However, the stop out level depends on the Forex broker being used. If the open positions generate more losses than profits, a new level will begin. This level has a different set point, depending on the broker, but generally, it’s set at 50% margin level. If the trades level moves below that, the stop out level is triggered.
Normally, when a stop out level happens, the broker first closes the less effective trades, that is trades with less profit value. The broker continues to close down trades until it hits the margin call level, stopping the stop out level. This is done to stop the trader’s account from reading negative. When the losses of a trader surpass the account balance, it results in a negative balance. However, recently most regulatory bodies protect the trader’s account from negative readings. Nevertheless, the trader’s account might read zero. Now, that we’ve explained what is stop out level in Forex trading, let’s take a look at some examples.
50% stop out level example
Let’s briefly explain an example using the USD/EUR. In a real-life trade, a trader has equity of 1,000 USD, and the required margin for a 10,000 USD trade is 2%.
Hence, the locked-up margin will be 200 USD.
To estimate the margin level, the available capital will be divided by the used margin and it will be estimated in percentage.
(1,000/200) multiplied by 100% = 500%. This means a trader has a 500% level of margin on their trading account. This means the trader can easily open new positions. However, as new trades are opened, the used margin increases, thereby reducing the margin level.
Let’s say in a case where a trade goes sideways and the EUR/USD declines. Initially, the loss was trivial, but as the trade goes on, the loss becomes significant causing a potential equity loss. The losses incurred hitting $800 in this position.
This resulted in the decline of the margin level to 100%. This is due to the reduction of the current capital from 1000 USD to 200 USD. This is the point the forex broker issues a warning signal to the trader. A margin call is issued, and the trader is expected to refill the balance or close the position.
Example of Stop Out Level
Let’s take a look at some examples to broadly explain how stop out works.
For instance, a broker offers a 50% margin call level and a 20% stop level. A trader owns a trading account of $100,000, and a single position is opened with a $10,000 margin.
When the market goes sideways and the trade declines registering a loss of $95,000. Your account balance declines to 5,000 ($100,000 – $95000). This indicates that the trader’s capital has hit 50% of the required margin of $10,000. Therefore, the broker issues the trader a margin call warning.
If the trader ignites this warning and continues to trade, when the loss hits $98,000, your current capital automatically hits $2,000 ($100,000 – $98,000). This means your capital has declined to a 20% used margin. Therefore, a stop out will be activated, and the broker will automatically close your open positions.
Another example:
For instance, a forex broker offers a 200% margin call and 100% stop out level. A trader owns a trading account balance of $15,000 and he/she opens a trade with a $2000 margin.
When the market moves sideways against the trader causing a loss of $11,000. This implies the trader’s trading account is left with $4000 ($15,000 – $11,000). This means the trader’s capital has hit the 200% used margin ($2,000), and therefore, a margin call will be triggered.
In a case where the trader ignores the margin call, and his/her account balance hits $13,000. The trader’s equity instantly drops to $2,000 ($15,000 – $13,000). The trader’s capital hits a 100% used margin, which indicates the broker will enforce a stop out and automatically liquidate the trades.
The above-mentioned examples explains what is stop out level in forex trading.
How to Use Stop Out Calculator
As stated earlier, a stop out is majorly the basic margin level required to keep a position open. Once the stop out level is reached, the broker automatically closes the trader’s open trades.
Stop out levels are provided by the Forex broker. There are no specified levels, as it differs according to brokers.
What is a Stop Out Calculator?
Stop out calculators are used in calculating the stop out levels. Using so vital data the calculator estimates trader’s stop out level. Traders often wonder how to use a stop out calculator? However, this calculator is easy to use and provides accurate results.
Stop Out Level Calculator, benchmarkfx.co.uk
How to avoid Stop Out in Forex Trading
Avoiding stop outs is the ultimate goal of a forex trader. For a trader to successfully avoid a stop out, they need to follow some specific guidelines.
Commonly, avoiding a stop out is all about following accurate trade management, however, listed below are some useful guidelines that enable a trader to avoid stop out levels.
Firstly, opening too many trade positions at the same time is not a good idea. This is because numerous open trade positions mean less equity as an available margin. The more trades are open the more capital is used to maintain the trade. To avoid a margin call and stop out level, avoid opening numerous trades simultaneously.
A trader should avoid chaos, or keep it at a bare minimum. This enables the trader to maintain good trade management. Traders are advised to use tight stop loss orders. Using stop loss orders helps a trader to control their loss. However, if the current open position is not profitable, the trader is advised to close it, restrategize and open new trades. This will help the trader maintain a good trading balance. Commonly, leaving unprofitable trades open is not a good idea. It results in automatically closing down of the trades by the broker.
Using hedging strategies is another strategy used by traders to avoid stop out level. However, traders do not understand how hedging works. In Forex trading, unprofitable trades are a must, even professional traders have encountered several unsuccessful trades. However, the difference is their ability to control their losses and ensure to balance out their trades. As a new trader, learning how to control losses by using various forex trading strategies should be a top priority.
We already talked about the causes of stop loss. We earlier stated margin calls and stop outs levels are issued by a broker due to a low trading account balance. That is the required margin is higher than the available margin. In this case, the trader can avoid a stop out by depositing more funds into his/her trading accounts.
However, traders are advised to trade with the amount they’re willing to lose.
This all boils down to adequate account management.
For instance, traders should use minimal leverage. Professional traders only make use of 2.5% or a maximum of 5% of their capital. For new traders, trading with little leverage should be a priority. This is because using excess leverage can result in loss of funds, especially as a new trader. A new trader should test their forex strategies using a demo trading account. This will help familiarize them with the market before entering a live trade with real funds.
Conclusion
In this case, experience is not the best teacher. Totally avoiding stop outs in trade is better than finding a solution to a stop out level. It is important to know what is stop out level in forex trading and also how to use a stop out calculator. This article explains all these in detail.
Additionally, traders are advised to extensively learn how the forex market works and how to navigate the market.
