What Is A Stop Out Level in Forex Trading?

A stop out level in forex signifies a specific ‘margin level’. This is essentially a predefined point at which a trader’s open positions will be automatically closed to ensure the account doesn’t go negative. The amount of equity in your account in relation to your margin is represented by the margin level %.

The significant influence of leverage here is undeniable. Higher leverage means you’re using less margin to maintain a position, hence increasing your free equity. However, high leverage also means greater risk. You can lose a larger portion of your equity before the stop out is activated, potentially wiping out a significant portion of your account.

For a quick computation of required margin depending on the trade size, pair, and leverage, FxPro offers a handy online calculator. Notably, stop outs don’t just apply to forex but to the entire CFD trading account.

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How Stop Outs are executed

On platforms like MT4/MT5 and FxPro’s native system, trades begin auto-closing starting from the least profitable when a stop out is activated. In contrast, the FxPro cTrader platform employs a ‘smart stop out’ feature. Instead of fully closing a trade, it partially closes it, starting with the one consuming the most margin.

It’s crucial to know that ‘Stop’ orders, which include stop outs for forex and other CFDs, are executed at VWAP (Volume Weighted Average Price). This implies there might be slippage once a stop out is activated. Nonetheless, FxPro offers Negative Balance Protection in line with their Order Execution Policy, ensuring clients don’t lose more than their overall investment.

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How to calculate Forex stop out

The stop out level hinges on the broker’s set level, your equity, trade size, and leverage. For FxPro users, the stop out level stands at 50% on all trading platforms, a regulatory requirement. Thus, if your equity falls to 50% of your used margin, a stop out gets activated.

Stop Out Examples

Imagine starting with a deposit of €10,000, trading 1lot (100k units) on EURUSD with leverage at 1:20. This means a used margin of €5000. If your Equity goes down to €2500 (50% of your used margin), the trade will be auto-closed or partially closed on cTrader.

Another example involves determining the stop out level using price or pips. Say you start with $7000 and open a Long position of 1 lot EURUSD at 1.19500 with 1:25 leverage. The used margin is $4,780. At 50% stop out, this will be when equity falls to $2,390, or a $4610 loss. Given a pip value of $10 for a 1.0 trade size for EURUSD, a 461 pip loss will result in a 1.14890 price.

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How to Avoid or Prevent Stop Out?

The most straightforward way to circumvent unforeseen stop outs is implementing strong risk management techniques like setting stop losses or capping exposure. Additionally, regularly topping up your account can bolster your margin level. It’s also wise to steer clear of trading during market gaps or weekends.

Stop outs when hedging

Some traders use hedging to cushion losses from a bad trade. With FxPro, only one lot of margin is necessary for hedge trades, allowing the creation of an opposing trade on the same pair without affecting used margin. However, hedging with low equity is risky, as any bid/ask spread widening can hit the 50% margin level.

Moreover, currency value changes can influence your unrealized PnL, possibly causing a forex stop out. Lastly, remember that hedged positions will incur overnight swaps, potentially reducing equity.

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Stop out alerts

Though FxPro doesn’t issue margin calls, some platforms, like cTrader, allow users to set margin email notifications. FxPro’s web trader and MT4/5 offer email and mobile notification options respectively, alerting users when a stop out happens.

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FAQs about FXPro’s Stop Out Level

1. What is a stop out level in forex trading?

A stop out level in forex refers to a predefined margin level where a trader’s open positions are automatically closed to prevent the account from going negative. This margin level percentage indicates the ratio of your equity to the margin used. Leverage can greatly influence this; using more leverage means you’re using less margin to secure positions, increasing the risk of reaching the stop out level.

2. How are stop outs executed on different platforms?

On MT4/MT5 and FxPro native platforms: Once a stop out is triggered, trades start to close automatically, starting with the least profitable. On the FxPro cTrader platform: A “smart stop out” feature is used. Instead of closing the entire position, the trade is partially closed to bring the margin level above the minimum.

3. How is the forex stop out level calculated?

The forex stop out level depends on the broker’s set level, trade size, leverage, and equity. For instance, at FxPro, the stop out level is set at 50% across all its platforms. This means if your equity drops to 50% of your used margin, a stop out is triggered. The formula is: Margin level % = (Equity / Used Margin) x 100.

4. How can traders prevent or avoid stop outs?

Some steps to avoid unexpected stop outs include:

• Implementing good risk management techniques like setting stop losses.
• Monitoring margin levels regularly.
• Not over-leveraging.
• Avoiding trading during market gaps.
• Depositing additional funds to boost account equity.
• Closing positions or hedging cautiously.

5. Does FxPro provide alerts for stop outs?

While FxPro doesn’t provide margin calls directly, certain platforms offer alerts:

• In cTrader: Users can set up to 3 levels for margin email notifications.
• In FxPro native webtrader: An email alert can be set up to notify when a stop out has been triggered.
• In MT4/5: Users can set up mobile notification alerts for stop outs and other trade operations.

For more in-depth understanding, traders are advised to use a demo account before trading with real funds.

Fully understanding stop outs is essential to avoid unexpected trading shocks. If unsure, testing with a demo account before trading with real funds is always a good idea.