MARGIN CALL VS STOP OUT

MARGIN CALL VS STOP OUT

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Margin Call Level vs Stop Out level
While some Forex brokers operate only with Margin Calls, others define separate Margin Calls and Stop Out levels. Check the differences below:

If the broker says that the Margin Call = 100%
This means Margin Call = 100% and a Stop Out = equal 100% of the necessary margin. This means the Account Equity = Required margin x 100% = you will get a Margin Call and immediately stopped (Stop Out), where the position of your trading will be closed forcibly (one by one starting from the most unprofitable and until the requirements are minimum margin met).
If the broker says that the Margin Call = 30% and Stop Out level = 20%
This means the Account Equity = Required x 30% margin. You will get a margin call in the form of alerts warning. And if the Account Equity = Required margin x 20% your open position will be closed automatically start from the position that most unprofitable one.

How does it works on broker
If you see at the trading conditions on broker like this, Margin Call: 30% and Stop Out level: 20%, then:

This means when your account equity become 30% of the margin required, you will get a warning from the broker: `highlight` can be colored red in the columns of your balance, or a specific message, or email, etc. Say that your equity is now insufficient to continue trade and maintain an active position; and the options is you can close some of your trade or add funds to your account to meet the minimum margin requirements.

If you do not do so in a timely manner, you will approach the level of Stop Out - where the system [trading platform] will perform an automatic closure (Closed force) ranging from the most unfavorable and until the minimum margin requirements are met.

If you see at the trading conditions on such broker like this, Margin Call: 100% and was no mention of the Stop Out Level, then:

This means the Margin Call Stop Out = 100% Required Margin
When your equity is below 100% of the necessary margin, you will get a Margin Call and trading will be closed forcibly in the same manner described above (starting with the most unfavorable). Warning phase here omitted, because the broker has the right to close your trades without notice.


Formulas and Examples:
To calculate the margin requirement required for every open position::
Required Margin = (Market Quote for the pair * Lots) / Leverage.

Example: You want to open 0.1 lot (10 000 base currency) of EUR/USD at the current market quote of 1.3500 and with a leverage level of 1:400

Required Margin = (1.3500 * 10 000) / 400 = $33.75 In order to open & further keep such a trade, you'll need to have at least $33.75 of the available equity on the account. If we open 2 x 0.1 lots, the Required Margin is doubled = $67.5 and so on. The more positions you open, the higher is the requirement to keep them in the market.

How to avoid Margin Calls & Stop Outs?
  • Carefully choose the leverage. If you choose a lower leverage, make sure you have sufficient funds to open and maintain trades. If you choose a higher leverage, make sure you don't open more trades than you can handle with your account equity.
  • Reduce your risks. Control how many lots are traded at one time. Watch your account statistics for Required and Available Margin.
  • If in doubt about meanings of the numbers in your Account, read more educational topics about the subject
  • Place stops to protect your equity from significant losses
  • If in trouble and approaching a Margin Call point:
    1. Try changing your leverage to a higher one
    2. Add more funds to your account
    3. Close unprofitable trades before the platform does it for you
    4. Hedge those trades, IF you know how to get out of the hedged trades later (requires experience)

All these measure will delay the approaching of the Margin Call, BUT you would still need to manage your losing trades before they bring any more losses.

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