T
he worst of them all is coming in line. Similar to Margin Call Level, the Stop Out Level means only troubles.
When your Margin Level falls below a specific percentage level, you have reached the Stop Out Level and one or all of your open positions will be closed automatically (“liquidated”) by your broker because you can no longer support the open positions due to a lack of margin.
In other words, if you have reached a Stop Out Level, the Hell for your cash just came down to Earth!
This will happen when the Equity is lower than a specific percentage of your Used Margin.
Then your broker will automatically start closing out the trades, which are the most unprofitable ones in order to prevent your account from suffering further losses.
This act of closing your positions is called a Stop Out.
Remember that once the liquidation process has started, it is usually not possible to stop it since it is automated to do so.
Trader Liquidation
Even if you contact your broker’s customer support team when the liquidation starts, they will NOT be able to help you.
For example, if your forex broker has a Stop Out Level at 20%, your trading platform will automatically close your position if your Margin Level reaches 20%.
Let’s say that you already got a Margin Call when the Margin Level had reached 100% but still decide not to deposit more funds because you think the market will turn.
However, the market continues to fall. We will use the example from the Margin Call in the previous article.
The Margin call occurred and you’re now down 960 pips.
At $1/pip, you now have a floating loss of $960!
This means your Equity is now $40.
$40 = $1000 – $960
Your Margin Level is now 20%.
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.
Your position will be automatically “liquidated”.
When this happens, the Used Margin (that was blocked) will be released and it will become Free Margin.
Your floating loss of $960 will be “realized”, and your new Balance will be $40!
If you don’t have any open trades, your Equity and Free Margin will also be $40.
But if this is not the case and you have multiple open positions, the broker will start closing the least profitable positions first.
As we said, when a position is liquidated, the Used Margin will be released. So each closed position will release the blocked amount of money, which will result in increasing your Margin Level.
Your broker will continue to close positions until your Margin Level is above 20%.
If you look at the events on a brighter side, the Stop Out Level will prevent you from losing more money than you have in your account. You don’t want your account to be with a negative balance.
It is better to lose the money you deposited than the scenario when you have to give back the money that you haven’t even had in the first place.
Each broker has its own specific liquidation process, that’s why it is a good idea to check what will happen if you reach this level and how it will go in the trading platform you are using.
What if I have multiple positions open?
Let’s say the Stop Out level is at 100%.
If the Margin Level drops below 100% of the margin required, the liquidation process will start with the position that has the largest unrealized loss!
Then it will close the next position with the largest unrealized loss and it will continue onto the next ones UNTIL the Margin Level (maintenance margin) is back to 100% or higher.
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!
If you don’t want to cry later, better monitor your positions and your margin level! If you are not sure about a trade, it is good not to trade big, cause you will be the only one suffering from your mistake.
Now that you know what the metrics in your trading account mean, let’s play out different cases and see what will happen.
