In running Forex business, there are many terms that we need to understand so that our transaction and benefits can be maximized. One of important terms that should be understood by traders is stop out and the margin call. What is a stop out and margin call? Let’s discuss one by one the meaning of them, complete with the difference and an example of calculation. Stop Out is when the level of open transactions is closed automatically by the broker to avoid negative deposit positions. The company has the right to close traders’ position without telling them, in the case of equity less than 20% of the margin required (for the open position). If some of the positions are open, the company can close one or several of them, ranging from one, yielding the greatest loss.
The conditions of trading accounts are controlled by the server, which automatically close all positions, if the margin reached 10% (or less) to account “Lite”. The event is also recorded in the log file with the comment “stop out”. If some positions are opened, the first position that will be closed is a position with the highest floating loss. That is, if there are not enough funds in your account to keep the position open, your transaction will automatically be closed. That’s called “Stop Out”. This is done by the current market price. For real account values were 50% and 20%.
Next, we turn to what is Margin Call. Margin Call is a warning from the broker to traders that they had exhausted the margin deposit (In Metarade 4 will appear red in the trade menu). If the amount of money in your account is caught falling under the required margin or known as usable margin, it is quite certain that your broker will shut down some open positions and it is even possible that such condition will happen to all open positions. This act is done to prevent you from experiencing negative balance, although it happens in market which is moving quickly which has high volatile. Margin Call also can be seen easily through Margin Level. If you fall in margin levels close to 100% or less, your open positions can be closed automatically by the broker system. Here’s what we’d describe as Stop Out”.
Suppose the rules of the broker 100% Margin Call and Stop Out Level 50%, then:
Margin Call 100%
Still using the data from the example above, this means that when:
Margin = Equity x 100%
X100% = $ 125
= $ 125
So when your account equity remaining is $ 125, you are exposed to Margin Call. MetaTrader will give a warning in the form of appearance of the red color in the trade menu. This warning indicates if the margin deposit is up.
Stop Out Level 50%
Margin = Equity x 50%
= $ 125 x 50%
= $ 75
Equity means balance + deposit trading position at that time (the floating trade). When the equity remaining $75, stop out level is met, the position of your trade will automatically closed by the broker. If you have more than one open transaction, the transactions will be closed one by one until the margin level is met.
From the above explanation, we can conclude that the difference between Margin Call and Stop Out is: Margin Call is a warning given by the broker that your account has fallen past the required margin and there is not enough equity that could save your account to keep it open. Meanwhile, the Stop Out is the level where your open account will be automatically closed by the broker to avoid a negative deposit position or greater losses.
In addition to differences in Margin Call and Stop Out, make it certain that you also know the difference between what is meant by usable margin and separate it from the used margin. If the value of your account is falling between your usable margins up to the amount of trading losses, you must deposit additional money. If you do not do that, your broker will make sure that your position to limit the risk both to you and to the broker will be closed. So, you will never lose more than you deposited.
If you are going to trade with a margin account, it is important for you to know what the policies of your broker regarding the margin account. You should also know that most brokers require a higher margin during weekends. This can be in the form of 1% margin during its opening weekend, and if willing to hold positions over the weekend the margin can be increased up to 2% or higher.
Some traders believe that too much margin is dangerous, can cause Margin Call and Stop Out. However, it all depends on your own risk considerations. You’d rather jump over bridges or through the sides of the streets. Whatever your choice, make it certain that you read your broker’s policies thoroughly, especially regarding to margin. So you can understand and feel comfortable with the risk.
Some brokers explained about their leverage in terms of leverage ratios, while others use the term leverage percentage. The simple relationship between the two terms is:
Leverage = 100/Margin Percent
Margin Percent = 10/Leverage
Leverage is usually described as a ratio, such as 100:1 or 200:1
So, how to avoid Margin Call and Stop Out? Firstly, you should carefully select leverage. Make it certain that you have sufficient funds to open and maintain trade if you choose low leverage. And if you choose a higher leverage, don’t open more than you can handle with your account equity. Next, don’t forget to pay attention to your account statistics for available and required margin. Then, to protect your money from a big loss, know the right place to stop. If you approach a Margin Call point or have trouble, try to change your leverage to a higher or close unprofitable trades.