Margin call and stop out are critical values in the trading process, which signify a significant unprofitableness of transactions opened by the trader.
At the beginning of trading on the foreign exchange market, each player has to figure out, when the margin call and stop out begin, in order to keep his deposit safe from total losses.
As it is known, when opening a position, a certain share of a player’s deposit is charged by a broker as a guarantee in case it turns out to be unprofitable. Usually it is calculated according to the chosen leverage. Those funds, which are not put under recognizance, are considered to be free and may be used to make new transactions.
What is margin call on Forex?
Such signal is activated in order to notify a trader about the necessity to invest additional funds, it is necessary to secure all positions that are not closed currently. If this does not happen, and the position becomes more and more unprofitable, it will be partially or completely closed by the broker. This is due to the fact that if losses on the open trader orders exceed his balance, then the player’s losses will be paid out of the broker’s pocket.
It should be said, that the margin call is practically not used by brokerage firms on Forex – prices are changed promptly, and they not always have time to inform stock exchange participants about a significant drawdown.
What is stop out?
In contrast to the call margin, the stop out is the value, upon which the open unprofitable order, or its part, is automatically closed. Since it is never possible to forecast further price movement, all brokerage firms have definite stop-out values. This indicator is calculated on the basis of the account level, which is displayed in the terminal window and it is calculated automatically.
For example, if a player opens a transaction on a pair of euro/dollar with a value of 1.3600 and a volume of 0.01 lot (with a leverage of 1:100), the deposit will be 13.6 USD, while the remaining amount will be 86.4 USD (with a balance of 100 USD). In order to calculate the stop out value, it is necessary:
- To divide all funds in your account into the amount of bail.
- To multiply the obtained number by 100%.
So, the level of the account will be 735% (100/13.6 * 100%).
In general, the experienced traders are advised to lower the account level below 300%, because if the global trend emerges on the market, the stop out indicator may promptly reach the percentage, which is set by the broker, for instance, 20%.It will lead to automatic closing of one or several open orders.
Reaching of this percentage may be avoided, if you learn how to correctly calculate the maximum allowable drawdown for your balance. To do this, you should take from the amount of the deposit the amount of bail, which is multiplied by the stop out. So you can find the amount of the allowable losses before reaching this indicator. Using the above values, you can get 97.28 USD (100 — (13.6 * 0.20)), which displays the allowable drawdown for the player, who wants to avoid automatic closing of the deal. Calculating this parameter can help to eliminate the high risk of losing the entire deposit.
Finally, it should be pointed out, that the calculation of margin calls and stop outs is necessary for each participant of the foreign exchange market. In addition to the calculation of these important indicators, specialists in trading also advise not to open too many positions simultaneously, not exceeding the allowable margin of 10-15% of the total deposit. In addition, it is recommended to constantly monitor the current transactions, using stop orders, and learn how to calculate the account level, when opening positions for different currency pairs with different bails.