Lesson 10: What Is a Stop-Out Level?

In the previous lesson, you’ve learned one of the dark sides of margin trading: the margin call. Now, let’s look at the stop-out level, or when your broker forces you to close your position. 

One thing you should know is that the stop-out is the worst thing you’ll experience when margin trading. 

When your account equity hits the stop-out level, your broker will start purging (or liquidating) your open positions. It will start from the most unprofitable positions and work its way to the profitable ones.

Lesson Highlights

• The last course of action for brokers is to liquidate open positions under a losing margin account.
• When an account reaches the stop-out level, brokers will liquidate open positions one by one and only stop once the margin level becomes 100% again.
• When a margin position is liquidated, its required margin becomes a free margin to balance the trader’s margin level.

Margin Trading Risks: Margin Call Level vs. Stop-Out Level 

We all know that margin trading is essential to enter a position with only a small amount of capital. This trading makes the market accessible and affordable for most traders.  

But margin trading is not all rainbows and butterflies. It has its own dark sides, which all traders fear.  

These are the margin call level and the stop-out level. They are indicators of the losing streak your position experienced.    

Liquidating positions is the broker’s way to restore and balance out the   

Margin Call Level 

When you trade on margin, your brokers require you to deposit a small amount of your position’s notional value, which is called the required margin. Your required margins (if you have more than one position) will be called used margin.  

Technically, used margin is the sum of all the required margins you locked into your account to open a trade. 

Now, what does that have to do with the margin call level? 

Typically, your margin call level is at the same level as your used margin amount. The difference is that it’s expressed in percentages, while used margin is in a specific value. The margin call level serves as a threshold.

If your account’s equity reaches the margin call level, your broker will inform you that you need to monitor and adjust your position and equity carefully.

Example Margin Call Scenario 

Juan opened an account with a broker that offers a 50:1 leverage. He deposited USD 5,000 into his account, enabling him to control positions up to USD 250,000. 

Juan’s first position is going long on EUR/USD with a notional value of USD 100,000. This trade has a margin requirement of 2%, which equals to USD 2,000 required margin.  

With a USD 5,000 equity and USD 2,000 used margin, Juan’s margin level is in the comfortable 250%.  

After some time, Juan decided to add a position on GBP/USD with a notional value of USD 150,000. Since the margin requirement is 2%, the required margin for this position is USD 3,000.  

This increases his used margin to USD 5,000 and decrease his margin level from 250% to 100%.

Considering that his initial deposit is USD 5,000, his account balance supports all his positions. That leaves no space for potential losses and new open trades. 

This is now a critical point for Juan’s open positions. What he can do from here is to deposit additional money to his broker, close positions to restore free margin, or just hope that the market will go on his favor.  

Stop-Out Level 

When you fail to act upon the margin call, you can expect your account equity to reach your broker’s stop-out level.  

When this happens, your broker will forcibly close your open positions to balance out your equity and stop-out level. If the position continues to fall, the position purging will continue until the broker closes all the positions.  

This way, the broker protects you from losing money further, and themselves if your equity declines to a negative balance.  

The stop-out level depends on your broker. It can be lower than the margin call level or the same as it. Make sure you've read your broker's terms regarding their margin trading service. 

Example Stop-Out Scenario 

Juan is now in a critical stage of his margin trading. He just got a margin call from his broker. However, he believes that the market will go in his favor, so he kept his trade open without depositing additional balance to his account.  

But the market continues to crash against his trade positions, and it reaches the point where the margin level reaches the stop-out level. 

With this, he noticed that the broker forcibly closed some of his positions, and in turn, he saw an increase in his margin level.

Liquidation of Open Positions 

When your broker starts liquidating your positions, it’s ideal for your account to close the least beneficial or profitable position first. 

If closing only one position resulted in a balanced-out account equity and used margin, then the other positions will remain open.  

You can only hope that the market will move in your favor.  

Assume your open position started gaining unrealized profits. Then, your margin level will increase. This could potentially bring your margin level back above the margin call level, which translates to more profitable opportunities.