Understanding Stop Out

Stop Out is the critical level at which the broker automatically begins closing the least profitable open positions belonging to the trader. This action is taken to free up used margin and prevent the account from falling into negative equity.

Account Monitoring and Information

Traders can typically see the specific percentage at which Stop Out will be initiated for their trading account. For example, at FXTM, this information is usually available in the Trading Accounts Overview section.

The Margin Call and Stop Out Sequence (Example)

Consider an account where the Margin Call is set at 40% and the Stop Out is set at 20%. This defines the following sequence of events:

  1. Margin Call Trigger (40%): Once the trader's margin level reaches 40%, a Margin Call is issued. This is a warning alerting the trader to low equity.
  2. Trader Inaction: If the trader does not respond to the Margin Call (by depositing more funds or manually closing positions) and incurs further losses.
  3. Stop Out Trigger (20%): If the account margin level continues to fall and reaches 20% of the used margin, the Stop Out protocol is automatically triggered.
  4. Broker Action: The broker immediately starts closing the least profitable open positions until the required margin level is re-established.

Detailed Summary

Stop Out is an automated mechanism used by brokers to prevent a trading account from incurring negative equity by mandatorily closing the least profitable open positions. This action is triggered when the trader's margin level falls to a critical, predefined percentage (e.g., 20%). It often follows a Margin Call (a warning issued at a higher threshold, e.g., 40%) intended to alert the trader to low equity and prompt manual intervention before the Stop Out occurs.

Key Takeaways

  • Stop Out is a critical level where the broker automatically closes open positions.
  • The purpose of Stop Out is to free up used margin and prevent the account from reaching negative equity.
  • Traders can typically find the specific Stop Out percentage in their trading account overview.
  • Stop Out often follows a Margin Call, which is a warning issued at a higher margin level (e.g., 40%).
  • If the trader ignores the Margin Call and losses continue, the Stop Out (e.g., 20%) is triggered.
  • When Stop Out is triggered, the broker closes the least profitable open positions first.
  • This broker action continues until the necessary margin level is restored.