2023-01-23 18:21

Margin call and Stop Out in Forex

Trading in financial markets has its own rules; Margin Call and Stop Out are among the most important rules in the financial markets.
Margin call and Stop Out in Forex Margin call and Stop Out in Forex
In many financial markets, including forex, trading is done as a margin. In these markets, brokers use margin and leverage to allow users to trade more than their capital. Brokers prevent the loss of traders' capital in forex and financial markets by using margin call and stop out rules for margin and leverage.

What is Margin Call?

A margin call occurs when the in-progress trades' loss in the user's or trader's account is higher than a level called "Margin Call Level." In such cases, users cannot open new trades because they do not have a free margin or sufficient balance for a new trade, and the warning "You do not have enough money" will appear. In simple terms, a margin call is a situation where the trader cannot open a new trade due to insufficient stock.

The margin call level differs for different brokers. Brokers set the margin call level rules at their discretion. Traders must read the rules when registering. The margin call is 100% in Trendo broker, and the trader can use all the free margin for trading. A 100% margin call occurs when the user has no more free margin for a new trade.

A free margin is an amount traders can use to make a trade. The amount of money the broker receives as a security deposit and margin for making a trade is deducted from the free margin.

What is Stop Out?

In case the user's trades lose enough that their account's stop out level is activated, the broker will automatically close the user's open trade or trades that have the most loss to prevent the user's balance from becoming negative.

The stop-out level is a specific level at which if the user's trades loss exceeds a certain percentage of the balance, the user's stop-out will activate, and the broker will start closing the trade or trades that have the most losses until the user's total loss falls below the stop out level. In other words, the remaining balance in the user's account should not fall below a certain percentage of the balance, otherwise, the user's stop out will activate. The stop out ratio in different brokers can differ, and it is set according to the brokers' rules which every trader should read. The stop out level in Trendo Broker is 70%.

Suppose a user has a $1000 balance in Trendo, and a gold buy trade is in progress. If the user's trade, loses 70% of the balance ($1000), the stop out will activate. In other words, if the user's loss is $700, Trendo broker will close the trade due to stop out. Stop out can also be explained this way: if the remaining balance of the user's account reaches 30%, the trade will be closed. In this example, if the equity reaches $300, the transaction will automatically close by the broker.

What is Margin Call and Stop Out difference?

Due to a lack of sufficient knowledge, many users call the stop out state a margin call and think the margin call is such that the user's trades are closed in that state. That is not correct, the margin call is a warning that the user is not allowed to open a new position due to the current trades' high loss. But by adding new capital (account top-up) or closing their trading positions, the users can increase the current balance ratio and their account's margin for new trades. The stop out is a stage after the call margin, in which the amount of the trader's loss is so much that the broker automatically closes trades to prevent the account from becoming zero or negative.

How to get out of the stop out and margin call state?

Many traders, when their trades are at a high loss, before reaching the stop out percentage, withdraw their account from these situations with three strategies so that their account does not suffer from stop out and the broker does not close their trades automatically.

  • The first strategy is to increase the balance or top up the account. This way, the trader reduces the possibility of stop out and can better manage trades. With online deposit methods in Trendo Broker, you can immediately top up the balance so that the account does not stop out.
  • The second method is to close one or more open trades. The trader decides to close some wrong trades, to reduce the possibility of a stop out in his account by checking his account and trades.
  • However, in the third method, traders reduce the probability of stop out using both account top up and closing some wrong trades methods.

Methods of preventing margin call and stop out

In financial markets, including forex, traders follow a trend so that their account does not suffer from margin calls and stop outs. Margin calls and stop-outs usually happen in high-risk trading conditions and are dangerous for traders. 

To avoid margin calls and stop outs, traders must follow the capital management rules in their trades and trading strategies. By observing the appropriate trading volume and the loss limit, which are the two main pillars of capital management, you can easily avoid margin calls and stop outs.

Traders must use appropriate leverage in their trading accounts. The lower the account leverage, the less the free margin for trades; as a result, the trading volume that is tradeable in the account will be less. Therefore, the possibility of the account suffering from margin call and stop out is reduced.

Traders shouldn't use all the margin in the account for trading; They must not trade with full margin and maximum trading volume. The higher the trading volume, the more difficult it is to manage the trade, and the possibility of stop out and margin call also increases.

Why do brokers have stop out and call margin for trades?

Many unprofitable trades, if not stopped, the trades face losses exceeding the trader's account balance. For this reason, the broker sets a loss limit for the traders so that they do not have to compensate for the losses. Each broker or forex broker has their own process. Therefore, when opening a trading account, users must read the broker's privacy policy to get an overview of the broker and the trading account.

Margin call and Stop out advantage

Although in terms of psychology, margin call and stop-out may negatively affect the trader's trading mood, and it is a situation that traders do not like and avoid in different ways, however, margin call and stop-out prevent the trader's capital from becoming zero and will give the user the possibility to recover and return the initial capital. Therefore, when the account is stopped-out, it is better to strengthen your trading spirit, then start trading again after a few days of rest and capital management.

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