Forex trading is a popular method of investing in the financial market. It involves buying and selling various currency pairs in order to make a profit. However, forex trading comes with its own set of risks and challenges. One of these risks is the possibility of being stopped out. In this article, we will discuss what a stop out is and when it can occur in forex trading.
What is a Stop Out?
A stop out is a term used in forex trading to describe a situation where a trader’s account falls below the required margin level. When this happens, the broker will automatically close out the trader’s open positions in order to prevent further losses. The stop out level is set by the broker and is usually around 20% to 30% of the margin level.
Margin level is the percentage of funds that are available to open new positions. It is calculated as follows:
Margin Level = (Equity / Margin) x 100
Equity is the total account balance including the profits and losses of open positions. Margin is the amount of money required to open a position.
For example, if a trader has an account balance of $10,000 and opens a position with a margin requirement of $1,000, the margin level would be:
Margin Level = (10,000 / 1,000) x 100 = 1,000%
If the trader loses $5,000 on that position, the new equity would be $5,000 and the margin level would be:
Margin Level = (5,000 / 1,000) x 100 = 500%
If the margin level falls below the stop out level, the broker will automatically close out the trader’s positions.
When Would You Get a Stop Out in Forex?
There are several reasons why a trader may get stopped out in forex trading.
1. Insufficient Funds
The most common reason for a stop out is insufficient funds. If a trader does not have enough funds in their account to cover the losses of their open positions, the margin level will fall below the stop out level and the positions will be closed out.
2. High Leverage
Leverage is a tool used in forex trading to increase the potential profits of a trade. However, it also increases the potential losses. If a trader uses high leverage and the market moves against them, the losses can quickly exceed the margin level, resulting in a stop out.
3. Volatile Markets
Forex markets can be highly volatile, especially during news releases or economic events. If a trader has open positions during these times, the market may move against them, causing their margin level to fall below the stop out level.
4. Unforeseen Events
There are many unforeseen events that can affect the forex markets, such as natural disasters, political unrest, or economic crises. If a trader has open positions during these events, the markets may become highly volatile, causing a stop out.
How to Avoid a Stop Out
To avoid a stop out, traders should:
1. Use Proper Risk Management
Traders should always use proper risk management techniques, such as limiting their leverage and placing stop loss orders on their positions.
2. Monitor Their Margin Level
Traders should monitor their margin level regularly and ensure that it is always above the stop out level.
3. Stay Informed
Traders should stay informed about the latest news and events that may affect the forex markets and adjust their positions accordingly.
4. Use a Reliable Broker
Traders should choose a reliable broker that has a transparent policy on stop outs and margin requirements.
In conclusion, a stop out in forex trading occurs when a trader’s account falls below the required margin level. This can happen due to insufficient funds, high leverage, volatile markets, or unforeseen events. To avoid a stop out, traders should use proper risk management techniques, monitor their margin level, stay informed about the markets, and choose a reliable broker.
