In trading, one of the risks that traders have to face and are always afraid of is “burning out”, which is really uncomfortable.
But before the account gets burned, the first thing you face is a margin call.
If you don’t have money to add to your account, then your losing trade will be cut off automatically, called Stop Out.
Let’s find out what Stop Out is.
What is Stop Out?
Stop Out is a signal to close a trade, notified by the server in case if the client does not have enough money on the account to keep an open order.
Stop Out orders are established depending on the broker, closed at the current market price.
Assuming a trader loses on several trades, the trade with the largest loss will close first.
The process of closing orders is automatic and takes place at a time when the amount in the trading account has a certain percentage of the margin, usually 30%, depending on the exchange.
Margin call and stop out are set by the broker for each account type.
What are the consequences of Stop Out?
What is Margin Call?
When a trader’s account is below the margin specified by the brokers with the specified Margin call level – the level where you will receive a margin balance alarm, they will send a margin call to your account signaling your account balance. Your account is in jeopardy.
For example, if the usable margin is at 30%, you will receive a balance alert – margin call – if your equity account balance drops to 30% of the amount. deposit.
For example, if you deposit $1000 into your account and the account loses with a balance of less than $300, the exchange will notify you of a Margin Call.
When does Margin Call appear
In this case, you will receive a warning from the broker that you need to close your trade or deposit more money to reach the required minimum margin.
Furthermore, know that the broker will have to close your position at the prevailing market price, if your deposit-to-loss ratio reaches the stop out rate – known as the stop out level. .
If the stop out is 10%, this will happen if your equity drops to $100, which is 10% of the margin.
And sometimes, margin call alarm and stop out stop happening simultaneously, and if your drop is below 100% of the minimum to trade, the position is closed without any warning.
Notes to avoid being stopped out
As an investor, you should do your best to avoid getting margin calls and stop out levels.
To avoid a margin call message indicating that the amount of funds remaining on the trading account is low and that in the event of unfavorable market movements, a stop out may take place. In addition, we need to pay attention to the following things.
Do not use too much leverage
The use of leverage can make investors significantly more profitable.
However, the abuse of leverage can be harmful to investors, because it is a double-edged sword, you can make a lot of money and quickly, you can also lose a lot of money and also very quickly.
And when your money is at risk of losing quickly, margin calls and stop outs will be sooner or later for your account.
Trade with small volume
When trading we need to pay special attention to trading volume, because it is the core of a successful trader.
Trade with a moderate volume with the account, if not, make small, small trades here, depending on each trader’s point of view.
Agreeing to trade with a small volume will lead to less profit, but with that comes the risk of account burning will gradually decrease.
Since then we no longer think about margin calls and stop out.
No more commands
Psychology plays a decisive role in investment, when losing, human psychology wants to remove the loss of what is lost. This is the fatal weakness of the trader.
When there are a few losing orders, they will immediately think of “revenge” on the market and stuffed more orders.
If fortunately the market reverses and they can exit all trades without breaking even without loss, but if unlucky the market only goes one way and goes very strong, it turns out that the profits and disadvantages, those stuffed orders nothing can be removed, but the loss is even worse.
And then margin call and stop out to your trading account is only a matter of time.
If you can’t control the mentality in this case, then you are sure to fail.
