What Is a Stop Out in Forex Brokers?

Have you ever heard the term stop out? Have you ever encountered the term “stop out” when researching terms and conditions for forex brokers? Unfortunately, many traders overlook the Stop Out and place more importance on other factors such as, lot size, minimum investment, spread, or leverage. 

Stop out levels are crucial for your trading equity, they can become a nightmare if you ignore them. Therefore, it is important to learn how a Stop Out works. 

What Is a Stop Out? 

Stop out in forex is the execution by forex brokers of an order to close any or all open positions against traders. This results in traders not having sufficient funds to continue their trades. The brokers execute this order automatically, intended to protect traders’ trading accounts and prevent them from losing money. 

A Stop Out must be considered in conjunction with margin calls. The margin call is actually a warning system that signals brokers to prevent your floating positions from being stopped. 

Let’s say your broker has a margin limit of 40% and a Stop Out at 25%. Your equity leaves the margin at half of your used margin. If the market is going against you and your equity reaches 40% of your margin, you will receive a margin call advising you to close your trades. 

What happens if your broker warns you to keep your positions open and ignores the margin call warning?  If the price continues to move against you and your losses continue to increase to the point that your equity is reduced to 25% of your margin, your broker will stop trading without your consent. 

How Are Stop Outs Executed? 

Once a stop out is triggered on the MT4/MT5 trades will automatically close starting with the least profitable trade (if more than one trade is open). 

Smart stop out is a feature that is available on some platforms. This means that the trade is not closed completely but is only partially closed to increase the margin level. The trade with the largest margin is the first to be closed. 

Do Not Ignore Alerts 

Some brokers don’t provide margin calls. They won’t inform you if your margin level is low or near the stop-out point. While it is your responsibility to monitor your margin levels, some platforms provide alerts that can help you keep an eye on them or alert you to stop outs. 

You can also set up a mobile notification alert in the MT4/5 to be notified whenever a trade is completed. 

20% or 100% – Which Stop Out Level Is Better? 

As you can see, both high and low stop-out levels have advantages and disadvantages. For example, a forex broker who sets a stop out at 100% will have more funds protection. However, there is a greater chance of being stopped earlier. 

The upside to having a 20% level is its lower chance of being stopped early. As you can see, the 20% stop-out level allows for higher overall losses than the 100% level. Therefore, you can have more room to trade if the price moves in your favour. However, your trading account’s total funds will be much lower. As you can see, a stop out at 100% will result in a balance of $2,904.8. However, a stop out at 20% will result in a balance of $580.96. 

Based on your preferences, you can choose the best level of stop out. Do you want more control over your account but accept the possibility of being stopped earlier? Do you prefer more room for reversals but are happy with smaller funds once your trades have been stopped out? A high stop out level may be the best choice for you if this suits your trading style and needs. If you are tolerant of loss, you might choose a lower stop out level. 

To sum it all, stop-outs are an important part trading terminology you must fully understand in order to avoid any unexpected shocks to trading. To test it out before you invest real money, you can always open a demo account.