In simple terms, a stop out level in forex is a predefined point of 'margin level' whereby a traders' open positions will be closed, to avoid a negative account balance. The margin level % signifies how much equity you have compared to your margin. The use of leverage plays a big role in this, as the more leverage you use, the less margin you are using to secure position(s), leaving more free equity. This is another reason why excessive use of leverage is risky. You can potentially lose more of your equity before reaching stop out, effectively wiping most of your account.
To quickly calculate the required margin according to the pair, leverage and trade size, you can use our useful online calculator.
Of course, stop outs apply to the entire CFD trading account, not just forex trades.
On the MT4/MT5 and FxPro native platforms, once a stop out is triggered, trades will begin to close automatically starting with the least profitable (if there is more than one open trade).
On the FxPro cTrader platform, smart stop out feature is used, meaning that instead of closing the entire position, the trade is instead partially closed to bring the margin level back above the minimum level. This begins with the trade that has the biggest used margin.
It is important to be aware that 'Stop' orders, including a stop out in forex & other CFDs are executed with 'market execution', meaning that once triggered, orders are executed at VWAP (Volume Weighted Average Price). So bear in mind that the stop out, once triggered, may receive slippage.
FxPro offers Negative Balance Protection (subject to the FxPro Order Execution Policy) to ensure that clients cannot lose more than their overall investment.
The forex stop out level is calculated according to the specific level set by the broker, your trade size, leverage & Equity.
At FxPro For FCA/CySEC registered accounts, the stop out level is 50% Under SCB jurisdiction, the stop out level is 20% for MT4 and 30% for MT5/cTrader. For the purpose of this article, we will use the 50% level in our examples.
This means that once your equity falls to 50% of your used margin, a stop out will be triggered.
Margin level % = Equity / Used Margin X 100
This is displayed in your trading platform as a percentage whenever you have open trades:
In the screenshot above, you can see that the current margin level is 299.44%. This represents the equity 9981.19 being 299.4% more than the used margin of 3333.33 (9981.19 / 3333.33 X 100 = 299.44%)
Let's say for example that with a starting deposit of €10,000 you place 1lot (100k units) trade on EURUSD utilizing a leverage 1:20. Your used margin for this position would be €5000.
Once your Equity falls to €2500, which is 50% of your used margin, your trade will be automatically closed. (or partially closed in the case of cTrader)
Sometimes you may want to know the forex stop out level in number of pips or specific price at which a stop out will be triggered. This is possible with a simple calculation according to the pip value of the instrument you are trading.
Let’s say with a starting balance of $7000 and leverage 1:25 we open a Long position of 1 lot (100k units) EURUSD, at price 1.19500. The used margin for this trade is $4,780 (Trade size in units * price / Leverage). With a stop out at 50% we know that this will be when our equity falls to $2,390, or when we have lost $4610.
1.0 trade size has a pip value of $10 per pip for EURUSD. So, by dividing the loss by pip value, we can know that we will reach the stop out level in forex after a 461 pip loss, equating to price 1.14890.
The easiest way to avoid unexpected stop outs is to employ good risk management techniques. For example, setting stop losses, or limiting exposure. You can also top up your account equity to bring your margin level higher.
Another thing that can cause unexpected stop outs, is trading during weekends or market gaps. For more on Market Gaps please read our useful article.
For example, let's say you have running equity of €2300 and you are short 1.0 lot on EURUSD with 1:25 leverage, this gives you a used margin of €4000. The market closes at price 1.19500 and at this point, your margin level is 57.5% (2300 / 4000 X 100).
After the weekend, the market reopens at price 1.20000 (50pips price increase) which equates to approx. -€416.66 loss, bringing your equity down to €1883.34. This means that as soon as the market reopens, you will be instantly stopped out, as your margin level is now below 50%. (1883.34 / 4000 x 100= 47%)
To summarise, here are some actions you can take to prevent a forex stop out:
- Monitor margin level at all times
- Add more funds to increase your equity level
- Closeout position(s)
- Don't over-leverage
- Avoid trading market gaps
Traders will sometimes utilize hedge (opposing) positions to try and mitigate some of the losses incurred on a losing trade. At FxPro, only one lot of margin is required for hedge positions, meaning that you can open an opposing trade on the same pair without it affecting your used margin.
For example, if you already have 1.0 lot (100oz) short on Gold, the used margin would be around $9435 (based on price $1887.00 and leverage 1:20). If you then open a long trade on Gold for the same lot size, this used margin amount will remain unchanged.
This means you can enter hedge trades even when your equity is running low as long as it is above 0. You cannot open any new trades when your margin level is <100%, so if your margin level is already 80% for example, you will not be able to open any additional trades including hedged trades.
However, hedging at low equity levels is not recommended, as an increase in the spread could result in reaching 50% margin level. This is because the PnL on Buy positions is determined by the Bid price and Sell positions by the Ask price, so an increase to the bid/ask spread will increase unrealized loss or reduce unrealized profit, even though you are hedged.
Also, if you are already extremely close to the stop out level, changes in the exchange rate of the pair or currency of asset you are trading compared to your base currency can affect your unrealized PnL resulting in a forex stop out. For example, when trading EURUSD on a GBP based account, changes in the value of GBP vs USD may decrease the profit or increase losses in GBP terms.
Likewise, another thing to consider is overnight swaps. A hedged position will be charged swaps, as the charging leg will always be greater than the paying leg, reducing equity overtime. For more information about Forex Swaps please read our useful article.
FxPro does not provide margin calls, hence you will not be directly informed by us that your margin level I running low or close to stop out. Whilst it is your own responsibility to monitor your margin level, some platforms offer alerts to help keep an eye on your levels or be alerted to stop outs.
In the cTrader platform, you can set up to 3 different levels for margin email notifications:
On the FxPro native webtrader you can create an email alert to inform you when a stop out has been triggered.
In the MT4/5, you also have the option to set up a mobile Notification alert to be informed each time a position has been stopped out, as well as other trade operations.
In conclusion, stop outs are an important part of trading terminology that you need to fully understand, to prevent any unexpected shocks to your trading.
You can always use a demo account to see how it works before risking real funds.