What does it mean to “Stop Out Level” or “Stop Out”?
The Stop Out Level is similar to the Margin Call Level discussed in the last session, but considerably worse!
A Stop Out Level in forex trading occurs when your Margin Level falls to a particular percentage (%) level, at which point one or all of your open positions are automatically (“liquidated”) by your broker.
This liquidation occurs when the trading account’s margin is insufficient to maintain the open positions.
The Stop Out Level is reached when the Equity falls below a certain percentage of the Used Margin.
If this level is reached, your broker will automatically begin closing out your trades, beginning with the least profitable, until your Margin Level returns to above the Stop Out Level.
If your Margin Level is equal to or less than the Stop Out Level, the broker will close any or all of your open positions as soon as possible to protect you from further losses.
A Stop Out is the act of closing your positions.
Keep in mind that a Stop Out is not a choice. Because the liquidation process is computerized, it is usually impossible to stop it once it has begun. Aside from lending an ear as you sob loudly over the phone, your broker’s customer care personnel is unlikely to be able to assist you.
Example: Stop Out Level at 20%
Assume your forex broker has a 20% Stop Out Level.
This means that if your Margin Level reaches 20%, your trading platform will immediately close your position.
Stop Out Level = Margin Level @ 20%
You received a Margin Call when the Margin Level reached 100%, but you opt not to deposit further funds since you believe the market will flip. You’re not only a bad trader, but also a mad trader. A sucky, insane trader.
In any case, your sucky crazy self ends up…completely WRONG.
The market is still falling.
You are presently 960 pips down.
You now have a floating loss of $960 at $1/pip!
This means your equity has increased to $40.
Equity = Balance + Floating P/L $40 = $1000 - $960 Your Margin Level is now 20%.
Margin Level = (Equity / Used Margin) x 100% 20% = ($40 / $200) x 100%
*Used Margin cannot be less than $200 because it is the Required Margin required to open the position in the first place.
Your position will be automatically closed (“liquidated”) at this moment.
When you close your trade, the “locked up” Used Margin will be freed.
It will be known as Free Margin.
However, the end effect will be depressing for you.
Your floating loss of $960 will be “realized,” with a new balance of $40!
Because you have no active trades, your Equity and Free Margin will both be $40.
Here are your account stats in your trading platform at each Margin Level threshold: 
If you have many positions active, the broker will normally close the one with the lowest profit first.
Each closed position “releases” Used Margin, which raises your Margin Level.
However, if terminating this trade does not raise the Margin Level above 20%, your broker will continue to close positions until it does.
The Stop Out Level is intended to keep you from losing more money than you put in.
If your deal continued to lose, you would eventually run out of money and end up with a negative account balance! Brokers would like not have to come knocking on your house with a baseball bat to collect an unpaid balance, thus a Stop Out is intended to… STOP… your Balance from being negative.
What if I have Several Open Positions?
The preceding example depicted a scenario in which you traded a single position. But what if you had MULTIPLE openings?
Because it appears that you enjoy gambling, here is an illustration of how the liquidation process would function if you had two or more positions open.
Each broker has their own liquidation procedure, so be sure to check with yours.
BUT, this is a popular strategy that will give you a solid notion of the kind of terror you might encounter if you trade too big.
Assume the Stop Out level is set to 100%.
If the Margin Level falls below 100% of the needed margin at any stage, the trade with the biggest unrealized loss will be AUTO LIQUIDATED!
If you have numerous open positions, the open position with the highest unrealized loss is closed first, followed by the next largest losing position, followed by the next largest losing position, and so on, UNTIL the Margin Level returns to 100% or higher.
Depending on the size and unrealized profit and loss of your open positions, all of your open positions may be liquidated to meet the margin requirement!
Remember that YOU, and ONLY YOU, are responsible for monitoring your account and ensuring that you have enough margin to sustain your open positions at all times.
You have been forewarned. Don’t begrudge your broker if your position is automatically liquidated.
