Margin Call And Stop Out level Difference
Usually Margin Call And Stop Out level is one of the important things you must care about it as each Forex broker has a different Margin Call And Stop Out level so before open your account ask the fx broker about it, Now lets see what is the difference.
this means that Margin Call = 100% and Stop Out level = same 100% of the Required Margin
This means that once your Account Equity = Required margin x 100%
you’ll get a Margin Call and immediately a Stop Out, where your trading positions will be closed
forcibly (one by one starting from the least profitable and until the minimum margin requirement is met).
this means that once your Account Equity = Required margin x 30%
you’ll get a Margin Call in the form of a Warning.
And when your Account Equity = Required margin x 20%
your trades will be closed automatically starting form the least profitable one.
While some Forex brokers operate only with Margin Calls, others define separate Margin Calls and Stop Out levels.
What’s the difference?
Margin Call is literally a Warning from a broker that your account has slipped past the required margin in %, and that there is not enough equity (floating profits – floating losses + unused balance) on the account to support your Open trades any further.
(Speaking of trades, definitely only the losing trades will drag your account equity down, but even if you haven’t accepted the losses yet, at some point you might run out of money, because your floating losses count).
Stop Out level is also a certain required margin level in %, at which a trading platform will start to automatically close trading positions (starting from the least profitable position and until the margin level requirement is met) in order to prevent further account losses into the negative territory – below 0 USD.
How does it work with different brokers?
If you see in the trading conditions something like this:
Margin Call – 30%
Stop Out level – 20%
This means that when your Account Equity becomes equal 30% of the Required Margin, you’ll get a warning from a broker: it can be
either a highlight on your platform, or a certain message, or an email etc. saying that your equity is now insufficient to continue trading and maintaining currently active positions; and that means that you have to either think about closing some of them or add more funds to the account to meet the minimum margin requirements.
If you don’t do so in a timely manner & the market still doesn’t cut any slack to your losing trades, you’ll be approaching the Stop Out level – at which the system [a trading platform] will perform an automated closure of your unprofitable trades starting from the least profitable and until the minimum margin requirements are met.
If you see in the trading conditions something like this:
Margin Call – 100%
No mentioning of a Stop Out level
This means that Margin Call = Stop Out level = 100% Required Margin
When your equity slips past 100% of the Required Margin, you’ll get a Margin Call & the trades will be closed forcibly in the same manner described above (starting with the least profitable one). The Warning Stage here is omitted, BUT don’t be overexcited about the opportunity to get a Warning first with the 2 staged process, because a broker keeps the right to close your trades without prior notice even if it’s only a Margin Call “stage”.
Formulas and Examples:
To calculate the margin requirement required for every open position:
Required Margin = (Market Quote for the pair * Lots) / Leverage.
Example: You want to open 0.1 (10 000 base currency) lots of EUR/USD at the current market quote of 1.3500 and with a leverage level of 1:400
Required Margin = (1.3500 * 10 000) / 400 = $33.75
In order to open & further keep such a trade, you’ll need to have at least $33.75 of the available equity on the account.
If we open 2 x 0.1 lots, the Required Margin is doubled = $67.5 and so on. The more positions you open, the higher is the requirement to keep them in the market.
Account equity = available not used in trade funds + floating profits from still open trades – floating losses from still open trades
Margin Call = Account equity has become equal to Required margin.
Pros and cons of 100% Margin Call vs lower % Margin Calls & Stop Outs
(+) being stopped at 100% margin saves for traders significantly more money when the losses are inevitable;
(-) being stopped at 10% margin saves only a few dollars on the doomed account.
(-) having a 100% margin requirement means that the Margin Call is looming much closer
(+) having a low 10% margin requirement puts the risks of getting a Margin call further away
(+) 100% margin requirement does the final stage money management job for you, so you won’t lose your last short if you don’t have the skills yet to do the proper money management yourself
(-) 10% margin requirement requires a perfect understanding and managing of the own account equity and margins.
How to avoid Margin Calls & Stop Outs?
1. Carefully choose the leverage. If you choose a lower leverage, make sure you have sufficient funds to open and maintain trades. If you choose a higher leverage, make sure you don’t open more trades than you can handle with your account equity.
2. Reduce your risks. Control how many lots are traded at one time. Watch your account statistics for Required and Available Margin.
3. If in doubt about meanings of the numbers in your Account, read more educational topics about the subject.
4. Place stops to protect your equity from significant losses.
5. If in trouble and approaching a Margin Call point:
a) try changing your leverage to a higher one
b) add more funds to the account
c) close unprofitable trades before the platform does it for you
d) hedge those trades, IF you know how to get out of the hedged trades later (requires experience)
All these measure will delay the approaching of the Margin Call, BUT you would still need to manage your losing trades before they bring any more losses.