Each retail forex broker or CFD provider establishes its own Margin Call and Stop Out Level. It is critical to understand your broker’s Margin Call and Stop Out Levels!
Many traders do not even bother to research what they are before opening an account; they simply start trading. Traders sometimes disregard or overlook these levels, to the damage to their accounts.
Different forex brokers handle a Margin Call in different ways.
Some brokers consider a Margin Call and a Stop Out to be the same thing, which means they will not send you a warning message and will immediately begin closing your trades along with a message telling you of the action!
A broker, for example, may set their Margin Call Level to 100% with no distinct Stop Out Level.
This means that if your Margin Level falls below 100%. Without any warning, the broker will automatically close your position.
Other brokers handle a Margin Call and Stop Out in a different way. They employ a Margin Call as an early warning signal that your investments are about to be liquidated (Stop Out).
A broker, for example, may set their Margin Call Level to 100% and their Stop Out Level to 20%.
This implies that if your Margin Level falls below 100%, your broker will send you a WARNING that you either stop your trade or deposit additional money or risk reaching the Stop Out Level.
If your Margin Level continues to fall and reaches 20%, the broker will automatically close your position (at the best available price).
A “Margin Call” might be one of two things, depending on the broker:
- If there is a separate Stop Out, your broker will notify you that your account equity has fallen below the requisite Margin Level % and that there is no longer enough equity to sustain your open positions.
- If there is no separate Stop Out, your broker will automatically close your transactions, beginning with the least profitable and working your way up until the required Margin Level is met.
If you receive a Margin Call and are unsure what will happen to your trade, here is a flowchart to assist you understand what will happen to it (s).
When there is a distinct Margin Call and Stop Out Level, consider the Margin Call to be a “warning shot” and the Stop Out to be the automated action to reduce the possibility of your account ending up with a negative balance.
Because you get a “warning shot,” traders have more time to adjust their positions before they are automatically liquidated.
This is in contrast to the usual margin call policy, in which the Margin Call and Stop Out Level are the same.
There is no “warning shot.” You simply get “shot” (automatic liquidation).
Finally, it is YOUR duty to ensure that your account fulfills the margin requirements, and if it does not, your broker has the authority to liquidate (“Stop Out”) any or all of your open positions.
A Stop Out can be readily avoided with a thorough understanding of margin trading and the use of stop losses, correct position sizing, and risk management.
Next Lesson: The Relationship Between Margin and Leverage
