Stop Out is a critical term in the world of trading, especially on platforms like TradeLocker. It refers to a protective measure where your broker automatically closes your open positions. Stop Out Level is 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. This liquidation happens because the trading account can no longer support the open positions due to a lack of margin.
More specifically, the Stop Out Level is when the Equity is lower than a specific percentage of your Used Margin.
If this level is reached, 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.
How it Works
Imagine you’re on a rollercoaster – that’s your trading journey. The Stop Out is like an emergency brake that activates if the ride gets too wild. When your open trades go against you, and your account equity dips too low, the Stop Out mechanism kicks in. Your broker will start closing your positions, beginning with the one suffering the most loss, to prevent further depletion of your funds. Keep in mind that a Stop Out is not discretionary. Once the liquidation process has started, it is usually not possible to stop it since the process is automated.
Why is there Stop Out Anyway?
Stop Outs exist for a good reason. They’re there to protect you and your broker. Without Stop Out, losses could exceed your account balance, plunging you into debt and putting the broker at risk. It’s like having a lifeguard at the pool, ready to jump in if things go south.
Example: Stop Out Level at 20%
Stop Out Level = Margin Level @ 20%
Let’s paint a picture: Your Stop Out Level is 20%. You make some trades, but the market isn’t kind. Your account equity (the total balance plus or minus any profits or losses from open positions) falls to just 20% of the margin you need to keep those trades open. That’s when your broker steps in and starts closing positions. We know this might look like someone taking money away from you, but this is what happens when you don’t add more money when your account reaches the Margin call, and of course you haven’t, you think the market will turn to your advantage. But this comes back to bite you in your behind and the market continue to fall.
You’re now down 960 pips.
At $1/pip, you now have a floating loss of $960!
This means your Equity is now $40.
$$
\text{Equity} = \text{Balance} + \text{Floating P/L}
$$
$40 = $1000 – $960
Your Margin Level is now 20%.
$$
\text{Margin Level} = \left( \frac{\text{Equity}}{\text{Used Margin}} \right) \times 100\%
$$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 stage, your position will be automatically closed, a process known as ‘liquidation.’ This is a vital feature designed to protect your account from deeper losses. When this happens, the Used Margin that was reserved for your position gets released and becomes available as Free Margin. Let’s say you were facing a floating loss of $960; once the position closes, this loss is ‘realized.’
Your account balance would now be $40. Since you have no open trades at this moment, both your Equity and Free Margin will be equal to $40. This is an important moment to reassess and strategize for your next move in the trading journey.
What if I Have Multiple Positions Open?
If you’re passionate about trading, it’s important to understand how the liquidation process works, especially if you have multiple open positions. Different brokers may have their own unique liquidation procedures, so it’s essential to familiarize yourself with the policies of your broker.
Here’s a commonly used approach to give you an understanding of the process. Imagine your Stop Out level is set at 100%. If your Margin Level falls below 100% of the required margin, an automatic liquidation of your positions will occur, starting with the one with the largest unrealized loss.
In scenarios where you hold multiple positions, the system will close your positions in descending order of unrealized losses. This continues until your Margin Level (maintenance margin) reaches or exceeds 100%, ensuring your account’s stability.
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!
Remember, YOU, and YOU alone, are responsible for monitoring your account and making sure you are maintaining the required margin at all times to support your open positions.
How to Avoid Stop Out
To steer clear of a Stop Out, consider these tips:
- Keep an Eye on Margin Levels: Regularly monitor your account to ensure you have sufficient margin. You can always check your margin in the TradeLocker Order Panel.
- Use Stop Loss Orders: We have made it very easy to set the stop loss wherever you deem feasible. Use our SL&TP Calculator or On-chart Trading feature to manage your trading risk.
- Balance and Diversify: Each asset class reacts differently to the same economic event, so when one might be underperforming, another could be thriving, ensuring your portfolio doesn’t face the music when the market changes its tune.
- Keep up with market trends and news that could impact your trades and only invest what you can afford to lose and understand the risks involved.
Always remember, in the world of trading, the wise sailor doesn’t curse the storm; they navigate through it. Stay informed, stay balanced, and let TradeLocker be your compass in the vibrant world of trading.