In forex trading, capital management and a proper understanding of margin-related concepts play a decisive role in maintaining a trading account. One of the most important concepts in this area is the stop-out; a situation that can occur for any trader, especially during periods of high market volatility.
What is a Stop-Out?
A stop-out refers to a situation where a trader’s account balance decreases to a point where it is no longer able to maintain open positions.
In fact, a stop-out can be considered as an automatic stop-loss implemented by the broker. When the account reaches a point where it can no longer withstand further losses, the broker automatically closes losing positions to prevent the account balance from going negative.
Difference Between Stop-Out and Margin Call
Although at first glance, stop-out and margin call may seem similar, in reality, these are two completely distinct concepts with different roles and timing in managing account risk.
A margin call is a warning that occurs when the margin level of an account falls below the threshold set by the broker. At this point, the broker notifies the trader that they need to either deposit more funds or close some open positions to bring the margin level back to an acceptable level. However, in a stop-out, there is no opportunity for corrective action. At this point, the account margin has reached a level where the broker immediately and automatically starts closing positions to prevent the account balance from going negative.
This difference in timing and the type of intervention by the broker is important. In a margin call, the trader can react and take corrective actions, but in a stop-out, the action is fully automatic and the trader has no control or involvement in the process.
| Key Difference | Margin Call | Stop Out |
|---|---|---|
| Type of Alert | Warning to maintain the account | Automatic position closure |
| Trader’s Involvement | Opportunity for reaction and account correction | No reaction from the trader is accepted |
| Margin Level | Higher than stop-out level | The lowest allowable margin level |
How is the Stop-Out Level Determined?
The stop-out level is usually determined as a percentage of the margin level, and this percentage is set by the broker. When the margin level of the account reaches this specified percentage, the stop-out process is automatically triggered. For example, if the stop-out level at a broker is set to 20%, as soon as the trader’s margin level reaches 20%, the broker will start closing positions.
What is Margin Level?
Margin level is one of the most important indicators of the health of a trading account in the forex market, showing the account’s security against the risk of loss. This level is expressed as a percentage and represents the ratio of the account’s equity to the used margin.
Market volatility is one of the factors that can significantly affect the margin level and the likelihood of a stop-out. Even if you use balanced leverage and proper risk management in your positions, severe market fluctuations, especially during economic news releases, can cause a rapid decrease in the account balance and increase the likelihood of reaching a stop-out.
For this reason, having a clear understanding of market trends and performing appropriate analysis before every trade can help prevent these issues.
Margin Level Calculation Formula
To calculate the margin level, the following formula is used:
Margin Level = (Equity ÷ Used Margin) × 100
Where:
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Equity refers to the current balance of the account, which includes the floating profit or loss of open trades.
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Used Margin is the amount of margin that has been used to maintain open positions.
Numerical Example for Better Understanding of Stop-Out
Suppose you have a balance of $1000 in your trading account, and you have opened a position requiring a margin of $500. Your broker has set the stop-out level at 20%.
If due to a loss in the trade, your equity drops to $100, your margin level will be calculated as follows:
Margin Level = (100 ÷ 500) × 100 = 20%
At this point, the margin level is exactly equal to the stop-out level set by the broker. Therefore, the broker will automatically start closing your open positions without any prior warning to prevent further depletion of the account balance.
This process may occur in just a few seconds and is completely automatic and systematic.
How the Broker Functions During a Stop-Out
When the margin level of the account reaches the threshold set for the stop-out, the broker immediately starts the process of closing positions without the need for user consent. This operation is carried out based on an automatic mechanism designed to prevent the account balance from going negative.
At this point, the broker typically uses a specific algorithm that first identifies the most losing open position and closes it as the first trade. If, after closing this trade, the margin level returns above the stop-out threshold, the other positions remain open.
However, if the account status remains critical and the margin level is still insufficient, the broker continues to close other trades in order of their losses until the margin ratio returns to a safe level or all positions are closed.
This process can occur in just a few seconds and is usually carried out without any opportunity for the trader to intervene. Therefore, understanding and managing risk before reaching this point is crucial.
Factors Affecting the Reach of a Stop-Out
The occurrence of a stop-out in a trading account is the result of a combination of poor decisions and market conditions. Understanding the key factors that lead to an account reaching the critical stop-out level can play an important role in preventing it.
Using High Leverage Without Risk Control
One of the most common reasons for a stop-out is the excessive use of leverage. While high leverage can increase potential profits, if the market moves in the opposite direction, losses will also escalate at the same speed. Without proper risk control, using high leverage rapidly reduces the margin level.
Entering Trades Against the Trend and High-Risk Trades
Entering trades that do not align with the prevailing market trend or based on weak analysis increases the probability of large losses. Positions that are opened against the market trend are usually exposed to sharp corrections or a continuation of the trend, which quickly puts the account at risk of stop-out.
Keeping Multiple Positions Open Simultaneously
Having too many open trades, especially when correlated positively or negatively in the market, significantly increases margin consumption. In volatile conditions, if even one of these trades incurs a severe loss, the entire margin level is affected, and the account is exposed to a stop-out.
Severe Volatility During Economic News Releases
When major economic news is released, the market usually experiences unpredictable volatility. If open positions during these times lack proper protective coverage, significant losses may occur in a short period, leading to a reduction in the account balance. As a result, the margin level drops, and the stop-out process begins.
Not Using Stop Loss in Trades
Not having a stop loss for trades can be one of the main reasons for an account reaching the stop-out point. When a trader does not use a stop loss, if the market moves against them, there is no limit to further losses. This can lead to a sharp decline in the account balance and ultimately reach the stop-out point. Using a stop loss as a risk management tool helps the trader prevent large losses and preserve their capital.
Ways to Prevent Stop Out
Preventing a Stop Out stage is only possible through proper capital management and precise risk control. A trader who enters the market without detailed planning will be vulnerable to severe market fluctuations and may easily lose their account balance. Here, we will mention some key principles to prevent a stop out that must be followed by every professional trader:
Regular and Logical Use of Stop Loss
Using an appropriate stop loss is one of the primary and most effective methods for risk management. A stop loss allows you to limit the loss of each trade and prevent significant losses. The stop loss should be determined based on technical analysis and market fluctuations to effectively protect your account.
Avoid Overuse of Leverage
In the Forex market, high leverage allows traders to enter trades with larger volumes than their account balance. However, using large volumes in trades can cause even small market fluctuations to have a significant impact on your account balance. To prevent stop out, it is vital to use appropriate and logical volumes in relation to the account balance, especially in volatile markets.
Accurate Market Analysis Before Entering Any Trade Position
Before entering any trade, it is necessary to conduct a thorough analysis of the market conditions and ensure that the conditions are suitable for entering a trade. Choosing the right timing and conditions for trades helps you minimize the risk of stop out.
Maintaining a Sufficient Free Margin
One of the essential actions to prevent stop out is maintaining adequate free margin. By keeping an appropriate amount of free margin in your account, you can avoid severe market fluctuations and unexpected conditions and prevent automatic trade closures.
Maintaining a Balance Between Risk and Return
Ultimately, every professional trader knows that staying in the market and long-term activity is more important than achieving quick and temporary profits. Therefore, maintaining a balance between risk and return and selecting appropriate strategies is the only sustainable way to stay away from stop out and solidify one’s position in the professional path.
Difference in Stop Out Levels Across Brokers
One of the key points when choosing a broker is being aware of the stop-out level set by them. Each broker sets a different percentage for stop-out based on their risk policies and the type of clients they target. This percentage indicates at what margin level your trades will be automatically closed.
Generally, stop-out levels at brokers range from 5% to 50%. Brokers working with professional and experienced traders usually set a lower stop-out level to allow for more manual control of the account. On the other hand, brokers focusing more on protecting the capital of less experienced clients set higher stop-out levels.
Stop out is a protective mechanism to prevent a trader’s account from going negative. Understanding how it works and being able to calculate the margin level is one of the most important aspects of becoming professional in the Forex market. A trader who cannot understand the concept of stop out and predict it will eventually face automatic trade closures.
Role of Leverage in Stop Out Occurrence
Leverage is one of the most important trading tools in Forex that allows traders to control larger trading volumes with a smaller amount of capital. In simple terms, leverage enables you to enter the market with less money and open larger positions. However, this power also comes with many risks that, if not managed properly, can lead to a stop out.
Effect of Leverage on Margin Level
When using leverage, the amount of margin required to maintain a position decreases. Therefore, if the market moves against your open position, your losses will increase faster than your profits. This can lead to a rapid decrease in the account balance and eventually result in a stop-out.
How Leverage Can Lead to Stop Out?
Using high leverage without proper risk management can quickly expose your account to a stop out. Suppose you use a 1:100 leverage, which means you can open a position of 100 dollars for every 1 dollar of your account balance.
In such cases, even the smallest market fluctuation can have a significant impact on your account balance, and if not properly managed, your account will quickly reach the stop-out level.
Numerical Example for Better Understanding
Suppose you have $1000 in your account and use 1:100 leverage to open a position of $100,000 (you open a trade with a volume of one lot). If the market moves 1% against you, your loss will be $1000, which is equal to your entire account balance. In this case, the broker will automatically close your position to prevent your balance from going negative.
Preventing Stop Out by Proper Use of Leverage
To prevent stop out, it is essential to use lower leverage and manage risk carefully. Instead of using high leverage, it is better to use leverage levels that can withstand market fluctuations in unexpected situations and prevent automatic trade closures.