Stop-Out Level and What It Means

 You're monitoring your trades, the market starts to dip against you, and all of a sudden, your platform closes one of your open positions without your consent. You're suddenly in a panic. Did I accidentally click something?

No, no way. What likely happened is that

you hit your stop-out level. For traders, particularly new traders, this is one of the most alarming occurrences that can occur in the market.

But this doesn't have to be a mystery. We have seen so far that the stop-out level is simply a function that the broker built into all leveraged trade accounts, again to protect you and them, by forcing the account to liquidate the trade before it goes negative. Knowing what a stop-out level is, how it works, and how to avoid hitting your stop-out level is the difference between blowing up a trading account and sticking around for one more day.

What Is the Stop-Out Level?

A stop-out level is the terminal point at which your broker will begin to automatically close your open positions, because your account can no longer hold them. This is defined based on a percentage of your margin level.

The formula is:

Margin Level = (Equity ÷ Used Margin) × 100%

When your margin level hits or is below the broker's defined stop-out level—typically 50% or 20% depending on the broker—your trades begin to close.

Why do Brokers have Stop-Out Levels?

Stop-out levels are not intended to punish traders; instead, they protect both your account and the broker's account from negative balances. The broker will stop automatically closing trades at the level that they have defined as the stop-out (but you may have no further capital). There's not much more we can say about stop-outs!

Stop-Out versus Margin Call

Stop-outs are frequently confused with margin calls, but they are distinctly different:

• Margin Call: Margin calls represent a signal to act, which gets triggered whenever your margin level begins to dip to a level established by the broker (say it is 100 percent). At that point, you cannot open any new positions; however, your current trades can remain open.

• Stop-Out Level: When your losses continue or your margin level dips to a lower level (say 50 percent or 20 percent), that would be the stop-out level, and the broker begins to close trades for you automatically, one at a time, starting with the loser trades that are the biggest losers.

The margin call is like a yellow traffic light, and the stop out is like a red traffic light...

How stop-out works practically

Perhaps you could start with $2,000 in your account and plan to open trades with a $1,000 margin requirement.

• If your open trades were to go against you and your equity falls to $1,000, then your margin level is (1,000 ÷ 1,000) × 100% = 100%. So at this point, you would receive a margin call.

• If things continued to get worse, then your equity falls to $500. Then your margin level is (500 ÷ 1,000) × 100% = 50%. If your broker's stop-out level is 50 percent, the stop-out will begin to close your trades for you, starting with the biggest losers.

This is intended to stop further damage, but it can also cause shock if you don't understand what's happening, leaving you to wonder.

Average Stop Out Percentages Across Brokers

Stop out percentages vary, but typical ranges are:

• 50%: This is the most prevalent for retail forex brokers

• 20%: Brokers that are a little more tolerant will allow your account to go below 20%.

• 100%: These are stringent conditions, and mainly applicable in circumstances where significant regulation exists (not common).

Understand your broker's specific stop-out percentage before you begin trading.

The Psychological Aspect of Stop Outs

Stop-outs can feel harsh, especially for traders who don't monitor margin levels closely as a newbie. It is a frustrating feeling to see trades close, and not in your favor, when you believe you have planned for them. It feels unfair. But the reality is: it's not unfair, it's mathematics.

Stop outs provide one of the most challenging but most important educational aspects of trading: risk management.

Mistakes Leading to Stop Out

1. Over-leveraging: opened a position that was too great in size for your account.

2. free margin: not setting aside free margin for price action movements.

3. No stop loss or cut off: allowing the trade to progress indefinitely under onion skin conditions with heavy losses.

4. Over-trading: opening trades simultaneously or a large number of trades in a short space of time.

5. Trading with emotions: doubling down position ("revenge trading").

How to Avoid Stop Out

• Proper position size: appropriate trade size; ensure that a loss will not eliminate or significantly reduce your remaining free margin.

• Remain at a healthy level of margin. You should maintain a margin level above 200% as a reference.• Always Implement Stop-Losses: These keep equity safe long before they reach the stop-out level.

• Do Not Risk More Than 1% - 2% Per Trade: A golden rule of risk management.

• Keep Cash in Reserve: Extra funds provide a cushion during high volatility.

Stop-Out in Different Markets

The principles of stop-out are usually expressed in the context of forex, yet there are mechanisms for stop-outs in other leveraged financial markets:

• Stocks on Margin: If your equity drops below a certain level, brokers will liquidate your position.

• Commodities & Futures: The Exchanges enforce margin requirements strictly.

• Crypto trading: Due to the high level of leverage in crypto trading, stop-outs are exceedingly common.

The principle is clear: if a trader does not manage risk and deploy leverage, stop-out is a possibility.

Real-life example

A trader has a balance of $5,000 and opens several prominent forex positions with a total margin of $4,000. In a short time, the market volatility pushes their floating losses to $3,000, leaving their equity of $2,000.

• Margin level = (2,000 ÷ 4,000) × 100% = 50%

• If the stop-out level of the broker is 50%, then traders' positions will be closed on the first losses.

The point is that aggressive trading can be dangerous, and it is essential to maintain a margin level.

The Upside of Stop-Out

It may sound odd, however, stop-outs provide an essential buffer:

• They protect traders from going into debt.

• They provide discipline in showing what being over-leveraged results in.

• They remind traders that surviving is more important than any single trade.

In this sense, even though stop-outs seem punitive, they are fundamentally a last resort measure in our defence.

Conclusion

The stop-out level certainly sounds excessive, but it is simply a bar that protects traders from having their accounts blown entirely. If you understand it, see it being demonstrated, and know how it works, then it is possible to protect yourself from being surprised by your account getting force liquidated.

Keep in mind: trading is not about winning every battle, but staying in the game. Suppose you maintain a margin level that is healthy and practice appropriate risk management. In that case, you will never experience the shock of forced liquidation due to a stop-out, just as a concept you have read about, not as something that you have endured.