What is a stop out level in Forex and how does it work?

In margin trading, the balance between the existing (available equity) and locked up funds (used margin) is called the margin level. Traders need to be careful not to let it go below 100%. The more free margin you have, the more trades can be opened simultaneously. If margin level reaches a predetermined percentage, brokers will initiate a margin call, asking traders to refill their account balance or close some positions until the balance is restored.
The stop out occurs when the existing positions are going against the traders, which means they are losing money and the available equity is slowly reducing. When the margin level gets to 50%, a broker will automatically start closing the positions until the previous level is restored.

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Forex stop out level – what does it mean?

When people use margin to leverage larger trading positions, it can have various effects. Namely, it can:
  • Increase payouts received from larger positions
  • Reach the “maintenance margin” level where opening new positions is not possible
  • Go below the maintenance margin – a margin call level
  • Go below the margin call level – FX stop out level
Since we have already covered the part where margin and leverage increase the position size and payouts, We won’t mention that in this guide. Instead, let’s see what happens when the margin level goes below 100% because that is where the stop out level occurs.

In order to better understand Stop Out meaning in Forex, let's first explore why brokers use them. What happens when margin level hits zero? When free margin is used up, brokers start closing active positions to avoid trading account balances from going negative. But how can trading balance go negative? The answer is simple, when trading CFDs, traders use leverage, in other words they increase their purchasing power by borrowing money from their broker. When traders open highly leveraged orders in sharply moving markets, there is a possibility of losing more money than what's on the trading balance. If your balance becomes negative, it means that you owe money to the broker. To prevent account balance from going negative, most brokers offer negative balance protection, which enables brokers to partially close orders when the trade goes against a highly leveraged position. When a broker takes responsibility that your funds will never go negative, even if the unlikely event happens, due to market conditions or software problems, the broker will turn your negative balance back to zero.

When margin level goes below 100%

Traders try to maintain the margin level above 100%. That way, there is a possibility to open new positions, as well as maintain the existing ones. But if the open positions are not successful and lead to losses, the account balance – and the available equity with it – will start to decline. This will make the margin level reduce as well.
 50%25 stop out
Usually, when the level reaches 100%, the Forex broker will initiate a margin call: notify a trader that he/she needs to refill their account or close (liquidate) some positions until the margin level goes above 100% again. However, if they fail to do that, a broker will be able to close the positions itself.
This point where a broker can decide whether to close positions or not is called the margin call level. Even though they can do that, brokers may choose not to liquidate positions and wait for the clients to refill their account balance.

What is the stop out level Forex traders want to avoid?

If the trading positions continue to bring more losses, a new stage will begin. Now, it varies from one broker to another but generally, this point is set to a 50% margin level. If the level goes below that, the “stop out” level will start.
A stop out is a process of liquidating (closing) open positions automatically. This happens because, again, the available equity on the balance isn’t enough to maintain even the existing positions, not to mention to open the new ones.
What is a stop out level in Forex
Usually, when the stop out level occurs, the brokers try to liquidate the most ineffective positions first (the ones that are damaging your account balance most). They tend to keep liquidating trades until the stop out level stops and the margin call level occurs. They do this because if the losses continue to increase, they will finally lead a trader to a “negative account balance” – when there are more losses to the account balance than funds. It’s something like an unpaid loan, and no trader wants to experience it.

50% stop out level example

Let’s take a look at the example with a GBP/EUR position and see how all this works in real life. Let’s say a trader has 1,000 sterling as the available equity, the margin requirement for a 10,000-sterling position was 2%. Therefore, the used margin was 200 GBP.
Now, to calculate the margin level, we have to divide the available equity to the used margin and put it in a percentage: (1,000/200)x100%=500%. In this case, a trader has a 500% margin level on their account and can freely open new trades. However, as the number of trades increases, so does the used margin, which reduces the margin level.
Let’s assume that the trade didn’t go as planned and the GBP/EUR price went down. At first, the loss was insignificant, but after some time, it became large enough to threaten the whole balance. Shortly afterward, the losses reached 800 GBP in this trade.
As a result, the margin level came down to 100% because the available equity reduced to 200 GBP from the previous 1,000 GBP. At this point, a Forex broker sends a warning – a margin call – to a trader to refill the balance or liquidate the position.

How to calculate stop out level in Forex?

Let’s say a trader didn’t do much to change the situation and the losses continued to increase (the broker chose not to close the position for now). After some time, the loss reached 900 GBP and the margin level came down to 50%. At this point, the broker automatically liquidates the position (begins the stop out level Forex) in order to stop the losses and avoid a negative account balance on its client’s account.
 FX stop out level
When the account is liquidated, i.e., sold to the Forex market, the used margin will become zero (in other cases, where there are several trades open, it will simply reduce). This way, a trader will still have 100 GBP left on their account balance.

What is a stop out level in Forex, and how does it differ from a margin call level?

A stop out level may have different names like Margin Closeout Value, Liquidation Margin, or Minimum Required Margin, but all of them are the same: they mark the point where a broker starts liquidating existing positions.
Now, the two levels below 100% – a margin call level and a stop out level – may seem similar in some ways, but there is the main difference between them as well. They are similar because Forex brokers start to close positions at that point.
However, at the margin call level, a broker has an option not to do that and wait for a trader to refill their account balance or liquidate some positions. On the other hand, the liquidation process is automatic on the stop out level, meaning the broker has no option. That is the main difference between them, and there’s also the fact that the stop out level is closer to a negative account balance – probably the most dangerous thing for a Forex trader.

Be informed that Margin Call doesn't mean that your broker will take up a phone and give you a call. Margin Call messages are usually sent via emails. Traders may also get alert messages on their trading platforms. 

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How to avoid being stopped out

To avoid the common issue of getting stopped out in trading, you can follow some simple strategies.

Firstly, make good use of risk management strategies. When traders stick to these rules, it's almost certain they won't get stopped out. Every trade is accompanied by a Stop Loss (SL) order, stepping in to halt the trade well before it could reach the stop-out level.

Another essential tactic is avoiding oversized trading orders, which is part and parcel of your risk management plan. Seasoned traders stick to clear rules, never risking more than a predetermined amount in each trade. This precautionary approach prevents falling into the trap of significant losses.

Shift your focus from fixating on exact numbers to percentages when planning, thinking, and executing trades. For instance, following the rule of never risking more than 2% of your balance ensures you won't get stopped out. Even if you lose half of your trading balance, your risk per trade stays at 2%, providing a safeguard against substantial financial hits.

To safeguard against blowing up your account, traders must be disciplined, follow a profitable trading strategy, and implement effective risk management. Maintaining a trading journal to track progress and managing emotions like greed and fear is vital. Always plan your trades and stick to your plans.

Lastly, ensure you have enough capital set aside for professional trading. Many traders deposit small amounts and aim for huge profits every month, leading to taking excessive risks and often hitting stop-out levels. In the unpredictable world of trading, careful planning, emotional control, and sensible risk management can make all the difference.

A stop out level – Key takeaways 

So, what is stop out level Forex trading and what does it sometimes lead to? Let’s have a quick summary. With the help of margin and leveraged deposits in Forex trading, traders can increase their positions significantly. When they open a margin account and decide to place a trade, their Forex broker requires a certain portion of the position (used margin) so that it can maintain that position open.
How to calculate stop out level in Forex
One of the most important elements of the margin is the margin level. It helps traders check their trading funds and make sure the account balance doesn’t become empty. A margin level at 100% is generally considered a good point in Forex trading.
However, when a trade doesn’t go as planned, and it produces losses, the margin level can easily go below 100%. If it reaches a certain point (usually it’s 50% margin level), the broker will start closing the positions automatically until the margin level goes above that point. This is called stop out in FX, and the level at which it begins – a stop out level.
Forex traders are typically very cautious not to reach this level because if they do, some of their trades (or even all of them) will automatically be closed. On the one hand, it saves them from reaching a negative account balance, but on the other, it stops their trading process and doesn’t allow them to generate payouts anymore.

FAQ on stop out level in Forex trading

What is a stop out level in Forex?

In Forex trading, traders frequently use margin accounts to increase their position sizes. If they didn’t do that, they would need to deposit large funds like tens or even hundreds of thousands of dollars, which is not something that many people can afford.

So, to use margin and leveraged positions, traders need to deposit a tiny portion of their actual position. It will be a kind of service payment for the broker. However, as the new positions are open, these funds taken by a broker increase as well.

And at some point, where the existing funds on the account balance become smaller (usually half) than the funds taken by the broker, a process called stop out will begin. When this happens, the broker automatically closes open positions until the balance goes back to the satisfactory level.

What is Stop Out in Forex, and why do you need to keep track of it?

When you use leverage to have a larger trading capital, advantages of this approach also come with quite pressing risks, which is where the stop out Forex signal comes into play. Even though you can increase your prospective payouts with an increased trading capital, you're also increasing the amount of loss that you can experience in the market. 

And when you get a certain amount of losses in a row, your available equity decreases. Once it goes below the used margin, it reaches the stop out level. At this point, the broker will not just notify you about the shortage of margin funds and close your active positions until the balance is restored.

When you get a stop out trading notification, the best thing you can do is refill your account balance so that the least number of your active positions are closed by your broker.

How to calculate stop out level in Forex?

When it comes to the margin, there is an element called the margin level that indicates how much funds are left in the account to open new leveraged positions. It is a combination of the two additional elements: the available equity and the used margin.

To calculate the margin level, you must divide the available equity by the used margin and put it in percentages: (available equity/used margins)x100%. If the margin level is above 100%, a trader can open new trades.

But, if the margin level goes below 100%, the broker will start “stopping out” the current positions. A stop out in Forex usually happens at the 50% margin level. In real numbers, it means that the funds on the account are half the size of the funds taken by the broker. And at this point, the positions will be closed automatically until the margin level goes above 50%.

What is the difference between the Forex stop out level and a stop out?

When the margin level goes below a certain point – often it’s 50% in Forex, – the broker starts to automatically close the positions. This is called a stop out, and it happens without the broker’s actions.

Some people mix stop out and stop out level and while the two are similar in a fundamental way, they still are two different things. On the one hand, a stop out is an event that happens at some point in trading. Basically, it’s when a broker closes the positions automatically.

On the other hand, a stop out level is a certain point at which the action of “stopping out” occurs. It represents a certain margin level, which is usually 50% in Forex trading. Therefore, a stop out and a stop out level are different terms, while they represent the same action.

How to use a Stop Out calculator?

Stop out calculators help traders measure the price at which the trade will automatically get closed by the broker and what will be the loss amount. In general, Stop Out calculators require you to fill in which account currency you are using, the amount of equity, currency pair type, long or short position, and a trade size. The calculations are done automatically and are highly precise. 

What is Stop Out Forex meaning in simple words?

Stop Out level is a predetermined margin level at which a broker closes an active position to prevent further losses. Traders use leverage (using borrowed money from their broker) to increase their purchasing power, consequently, if they open oversized positions, they are in danger of losing more money than what they had on their account. 

How to avoid stopping in forex?

There are various ways traders can keep themselves from getting stopped out. The first and the easiest way to avoid getting stopped out is to use a proper leverage. High leverage increases your purchasing power and can result in higher profits, however, if the trade goes against predictions, losses can also increase significantly. When smaller leverage, around 20:1 and 30:1 is used, account balance is much safer. One more important way to defend yourself is to always use a Stop Loss order. A Stop Loss order will stop the trade way before your broker does. It's important to always use the Stop Loss order, as the number one reason why most traders blow up their accounts is that they let their losing trades run. 
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