The meaning of Stop Out
Stop Out is a signal to close a position forcibly, which is sent by the server, if the client finds that there are not enough funds on the account to maintain an open trade. The size of stop out is set by each broker individually. As a rule, losing trader”s positions are closed at the current market price. If the trader has gone into deficit on several positions, the forced closing begins with the most unprofitable of them.
Agreement on installation and use of stop out
It is advisable not to wait for the forced closure of a position and close the order on a message about the possible lack of funds to maintain it. Such signal is called a Margin call. It is usually sent to the trader when the loss exceeds 50-70 percent of available funds.
Can a stop out deposit go into deficit if it does not work?
Usually it happens for two reasons:
- Weak collateral for an open position, when large leverage is used for trading and the volume of transaction significantly exceeds the trader’s deposit.
- The occurrence of a gap – a stop out may not work if there is a price gap, sometimes its value reaches several tens of points. Which leads to a negative deposit.
Let’s consider such a situation on a concrete example
The stop out level is 10%, the trader’s deposit is 1000 dollars, the used leverage is 1:100. The deal is opened with volume of 1 lot, at that all trader’s funds are pledged. Unfavorable situation has arisen on the Forex market, and the loss on the open order is gradually growing, as soon as it has reached the amount of 900 dollars, the position has automatically closed. In this case, the trader’s account does not necessarily remain exactly 100 dollars, because it also takes time to close the position, and the price does not stand still.
Stop out is a kind of stop loss order, but only from the broker’s side, it allows to save the trader from losses, in case the trader cannot deal with the situation on his own.
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