Traders must be cautious as different forex brokers may have varying margin call and stop out levels. These differences can impact risk management, so it's crucial to understand your broker's specific policies before trading.
Every retail forex broker and CFD provider establishes their specific Margin Call Level and Stop Out Level.
Understanding your broker's Margin Call and Stop Out Levels is absolutely crucial!
Surprisingly, many traders neglect to ascertain these levels before opening their accounts, often diving straight into trading without a second thought.
Regrettably, overlooking these critical levels can have dire consequences for your trading account!
The handling of a Margin Call can differ significantly among various forex brokers.
Certain brokers treat a Margin Call and Stop Out as synonymous, meaning they won't issue a warning message but instead will promptly close your trades while informing you of the action taken!
For instance, a broker might establish their Margin Call Level at 100% without a separate Stop Out Level. In this case, if your Margin Level falls below 100%, the broker will automatically close your position without prior warnings.
Conversely, other brokers treat a Margin Call and Stop Out differently. They employ a Margin Call as an early warning system indicating that your positions are at risk of liquidation (Stop Out).
For instance, a broker might set their Margin Call Level at 100% and their Stop Out Level at 20%. Here, if your Margin Level drops below 100%, your broker will send you a WARNING, prompting you to either close your trade, deposit additional funds, or risk reaching the Stop Out Level. Only if your Margin Level further declines to 20% will the broker proceed to automatically close your position at the best available price.
Depending on the broker's policies, a "Margin Call" can take one of two forms:
In cases with a separate Stop Out, your broker notifies you that your account equity has fallen below the required Margin Level percentage, signifying that there is insufficient Equity to sustain your open positions.
In instances without a separate Stop Out, your broker will automatically close your trades, beginning with the least profitable ones, until the requisite Margin Level is restored.
If you ever receive a Margin Call and find yourself uncertain about its implications, refer to this diagram to gain a clear understanding of what will transpire with your trade(s).
When there exists a separate Margin Call and Stop Out Level, consider the Margin Call as a preliminary warning signal and the Stop Out as an automated measure to minimize the likelihood of your account going into negative balance.
Having this "warning signal" grants traders more time to actively manage their positions before the system automatically liquidates them. This approach differs from the traditional margin call policy where the Margin Call and Stop Out Level are one and the same.
In the latter scenario, there's no preliminary alert; it's akin to an immediate "shot" resulting in automatic liquidation.
In the final analysis, it falls squarely on YOUR shoulders to ensure that your account maintains the required margin levels. If those levels are not met, your broker reserves the right to liquidate ("Stop Out") any or all of your open positions.
With a strong grasp of margin trading, along with the judicious use of stop losses, proper position sizing, and sound risk management, a Stop Out can be effectively prevented.