What is stop out level in trading and why is it important?

Financial brokers typically provide information about stop-out level percentages in their trading account descriptions. There is a good reason why all reputable brokers include this information. The stop-out level is what happens after making a call when the trader is unable to add more funds to maintain open positions. This is why traders have to be careful and avoid being stopped out of trades. Let’s explain what stop-out level is, why it is so important, and how to avoid it in your trading with a practical step-by-step guide.

Understanding stop-out level

A stop out level is a predetermined margin level at which open trades will forcibly shut down by your broker. It is different from a margin call, which is a warning where a broker notifies its trader that the margin level is approaching critical levels and traders need to add more funds to their accounts to maintain open positions. Liquidation occurs when a trader’s open positions are in losses and allows brokers to ensure the trader only loses their money and not the borrowed funds from the broker using the leverage.

So, here is how stop-out happens:

1. Trader opens trading position using leverage
2. The position goes into losses as market movies in an opposite direction
3. Losses quickly approach dangerous levels and a margin call is issued
4. Losses exceed the stop-out level percentage and the broker liquidates all open positions

Stop out happens only after the margin call so that traders always get notified before the event is triggered.

For example, if a broker has set the stop out level at 20%, and the trader’s equity falls to 20% of their used margin, the broker will start closing positions. However, before this, it always sends a notification of a margin call. The first order to get closed is the order with the largest loss, something to bear in mind.

The mechanics of stop out level

Margin, leverage, and equity play critical roles in the stop out mechanism. Traders need to know how margin level is calculated:

Margin level (%) = (Equity / Used Margin) * 100

When a trader opens the trading position, the broker automatically locks the required margin which usually depends on the lot size and leverage. Knowing how much margin you need to open a certain lot size is critical. If a trader opens large positions with small accounts the chances of hitting a margin call before the trade goes into profits are high.

Let’s consider an example for better illustration:

• Trader deposits 1,000 dollars and opens a leveraged position that requires a 500 USD margin (500 USD is locked from the account)
• If losses reduce equity to 100 dollars, the margin level becomes (100/500)*100=20%
• If the broker has a 20% stop out level, then the platform will automatically start closing your positions

Before the stop-out level is triggered, the margin call will notify the trader to add funds to their account or open positions might get liquidated if losses continue.

Why is the stop out level important?

As we can see, the stop-out level can eliminate all open orders and liquidate trader’s positions. While positions are open, the losses are drawdown, meaning if the market reverses, the trader might get into profits, but when positions are closed the trader faces the reality of losses.

If a trader has a strategy that has a large stop loss or if the price tends to correct before it goes into the trader’s favor, the stop-out level might get triggered and make potentially winning positions lose money. This is why traders should carefully calculate their position size and implement strong risk management strategies.

How to avoid getting stopped out

Here is the most effective way to avoid getting stopped from open trades:

1. Check your broker’s stop-out percentage
2. Use moderate lot sizing so that no single trade hit stops out level
3. Use stop-loss orders to limit loss per trade
4. Check the required margin for opening a position

Imagine you have 1,000 USD in your account but the required margin to open 1 lot EUR/USD is 800 USD. If your position goes 20 pips against your position your trade will close to dangerous territory where losses exceed the available margin and your locked (required) margin will start to also lose money causing the broker to trigger a stopout.