Stop Out and Margin Call - a trader's insurance against total bankruptcy
Undoubtedly, the market provides a unique opportunity to make money with your knowledge. There is a high probability of success (with a competent choice of trading strategy), but there is no less probability of loss of invested funds. The situation on the financial market sometimes changes lightning-fast, when in an instant a rapid rise turns into an equally rapid fall.
It would seem that he does not distinguish between the personalities of market participants, and he is completely indifferent to the fate of any of them. You won - fine, traded - your problems. Bidding on the market will go on in any case with you or without you. At the same time, strangely enough, there are a lot of "guards" which will not allow the trader to lose "to nothing".
Insurance against a "drain"
Among such defenses are the levels of margin call and stop out. These completely different operations usually work in tandem. И Their goal is the same - to prevent the complete bankruptcy of the trader. The margin call operation is actually a warning to a market participant that his deposit is not enough to continue the transaction, and he must urgently decide - to deposit, if the trader is risky and wants to wait for the turn of events for profit, or to close all or most unprofitable transactions.
It is considered that the margin call is a telephone (which has not been practiced for a long time) message (warning) or message by other means of communication of the trader by the broker about the lack of money in his account. As a rule, such margin call has not been practiced for a long time. In turn stop out is a certain level of losses, which automatically closes the (most) unprofitable trades.
In this case, the broker independently, without warning, closes the deal. Practically, it is the same stop loss, but its value is usually determined by the broker himself. Stop out is expressed in percent and is defined as a ratio of trader's assets (Equity) and pledge (Margin). As a rule, minimum value of stop out at which there is a forced closure of transactions is 20 percent.
The practical side of the issue
In practice it is possible to trace this order in the terminal MetaTrader 4. Its value "Level" (in percent) is indicated in the "Trade" tab after the values "Balance", "Funds", "Free" and "Collateral". You can verify this by opening any position - either Buy or Sell.
A stop out order can be calculated using the formula:
stop out = (C / Z) x 100%,
Where C is funds,
H is the pledge or margin.
Funds "C" are defined as the difference of balance plus floating (non-fixed) profit minus floating (non-fixed) loss.
For example, at the time of calculating the level of stop out, the following indicators were recorded:
Balance - 10943.24 USD;
Bail - 1,500.00 USD;
Floating Profit - 0.00 USD;
Floating loss - 0.00 USD.
Accordingly, stop out = ((10943.24 + 0 - 0) / 1500.00) x 100% = 729.55%.
But a broker can set another level liquidity, e.g. 30%. In this case, when the Equity / Margin x 100% ratio becomes equal to 30 percent, the trade is automatically closed using the stop out operation. Thus, the transition of the deposit to a negative value is excluded. Moreover, the deposit will be returned to you in full, which, however, does not mean that the deposit will be the same amount.
And there is no contradiction in this. For example, you open a position with $200 on deposit. Immediately 100 USD is smoothly transferred to the pledge. The amount of free funds is also equal to 100 USD, the level is 200%. The market has changed the direction, trade has gone against you. At achievement of a loss of -100 USD, you run out of free funds, but the transaction will not be closed. The point is that the stop out order is still 100%, since ((200 - 100) / 100) x 100% = 100%.
The loss increases and reaches a value of -180 dollars. In this case, stop out = ((200 - 180) / 100) x 100% = 20%. At this level of loss, the transaction is terminated automatically, as the stop out is triggered. Thus, only $20 will remain on your account, although the deposit was returned in full.
On the one hand, margin call and stop out orders help the trader to avoid ruin, that is, their accounting may seem positive. But on the other hand, the presence of such operations may provoke unreasonable risk when waiting for the market to turn in the other direction. There is a possibility of not being able to open a position, even with the smallest lot, if a stop out is triggered by several losing positions, and the margin level rises.
Therefore - you can only hope for a stop out, but you can't "go bad" yourself. As the most effective protection against deposit depletion it is recommended to use stop lossBut that's a separate topic.