Margin Call and Stop Out. What does a trader need to know?

Margin Call and Stop Out

Surely many traders have heard these terms, and, unfortunately, some of them already know how they work in practice. But the majority of beginning traders, as a rule, confuse these concepts. Let's make it more clear.

Margin Call is a notification of a broker to deposit additional funds to guarantee the obligations under the losing positions of a client. In other words, the company simply warns that if the trader does not deposit funds and the loss on the client's trading account continues to grow and reaches a certain level, the broker will have to liquidate a certain number of positions.

Stop Out is a forced closing of clients' positions in case of insufficient funds to maintain open positions.

First, there is a Margin Call (warning); then, in case of insufficient funds on balance, there is a Stop Out (liquidation of positions).

Forced closing of positions begins with the most unprofitable position and continues until the required margin level is reached. Stop Out is designed to ensure that losses on the client's account cannot exceed the initial deposit amount. Otherwise, the account balance would be negative, and the broker would have to cover the negative difference at his expense (balance fixed). But sometimes such cases still happen, for example, on the news, after weekends, and on price gaps.

Each broker has its own level of margin call and stop-out. This level is controlled in the trading terminal. In MT4 and MT5 trading platforms, the "Margin Level" is displayed in the "Terminal" window, where the "Balance," "Equity," "Margin," and "Free margin" are also indicated.

Which parameters affect the change in the value of the "Margin Level"?

Only two main regulating factors can reduce the parameter "Margin Level" - it is a large floating loss and a large volume of deals.

How to avoid the margin call and stop out?

  • Keep the floating loss from growing, limit your losses, cut them as early as possible, and put stop-losses. No need to sit through any drawdowns
  • Don't open too many trades to avoid increasing your floating losses
  • Do not increase the volume of deals without any particular reason. Control your risk.
  • Try to close all deals by the end of the week.
  • Watch the "Margin Level" in the terminal and do not allow it to fall below 500%.
  • Choose the leverage carefully. The greater the leverage, the lower the margin. If you choose small leverage, make sure that the size of your deposit will be sufficient to open and maintain open positions. If you choose maximum leverage, monitor the number of open trades to ensure that the cumulative volume of all open positions does not exceed the calculated risk for all trades.

Have a good trade.

Start trading

by JustMarkets, 2022.10.24

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