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November 16, 2017

# Question:What does "Stop Out" mean in Forex? Is it different from "Stop Loss"?

What is the forced stop out of FX?

When you first knew about the existence of stop out, you would be wondering “why should we prevent stop out?”

In this article, we will explain the mechanism of forced stop out and what happens if it is executed.

## What is Stop Out?

Stop Out is the “compulsory settlement” performed by the FX company when the unrealized loss on the margin balance of the FX account exceeds a certain level.

While the Stop Out has the role of preventing a certain amount of loss, it also forces the risk of losing funds in an instant due to the Stop Out because it forcibly terminates the transaction with the unrealized loss.

To prevent Stop Out, it is necessary to know the mechanism and adjust the funds so as not to reach the trigger level.

In this article, we will explain the role and risk of forced Stop Out, the calculation method of triggering conditions, the Stop Out line of each Forex company, and the pre-measures to prevent Stop Out.

The mandatory Stop Out is triggered when the “margin maintenance rate” falls below the level set by each Forex company.

The margin maintenance rate is calculated from the FX account balance, the current valuation gain/loss, and the minimum margin amount required for trading.

## Example of Stop Out

“Stop Out” means that, when the Equity of your account drops below the certain level of your Margin required then the open trading positions would start liquidating.

For instance, the current level of Equity is 8989.17. Margin is 212.26.

Percentage Margin Level is 4234.91%.

If the stop out level is 50%, 50% of the Margin is 0.50 × 212.26 = 106.1, therefore in case the equity drops below 106.1 then open trading positions would be automatically liquidated by the system.

When you trade in the Forex market, the Percentage Margin Level is shown on the terminal in real time.

## How to calculate the Stop Out Percentage?

The margin maintenance rate (%), which is the trigger condition for stop out, can be calculated by the following formula.

Total Available Margin / Margin Requirement x 100

“Total Available Margin” is the total of FX account balance + valuation gain/loss during trading.

The larger this amount, the higher the margin maintenance rate.

The “margin requirement” is the minimum amount required to carry out a transaction.

## Negative Balance after Stop Out

Stop out is a mechanism that protects the customer’s loss from the loss caused by rapid rate fluctuations.

However, when “slippage” occurs, in rare cases, the customer’s assets may become zero or even become negative.

If the market moves at once in a few tens of seconds after the stop out is triggered, it will be settled by applying the changed rate because the stop out will not be in time.

For the above reasons, slippage may cause more loss than expected.

In other words, it is not “safe because there is stop out.”

As a workaround, you should make risk hedging by diligently adjusting transactions, responding to stop out alerts, and paying attention to exchange news provided by Forex companies.

Luckily with majority of online Forex brokers, you do not lose more than the total account balance, because of NBP (Negative Balance Protection).

## How to prevent Stop Out?

From here, we will introduce measures to prevent stop out.

To prevent stop out, it is effective to increase the balance of your account to increase the margin maintenance rate, or to make a stop loss yourself before a stop out occurs.

#### 1. Be aware of high leverage

If you are trading at a leverage of 1000 times or more of that leverage (that is, the margin amount necessary for trading is at the limit), the exchange rate can move slightly in the loss direction and stop out can be triggered soon.

To prevent this, use a stop out simulator to understand how much the current transaction amount and margin amount can withstand rate fluctuations.

Some brokers also offer up to 1:3000 high leverage though, such high leverage can both benefit you greatly and cause a huge loss in a moment.

#### 2. Cut losses frequently

Before you reach the stop out line, you can avoid stop out by clearing yourself the transactions that tend to lose.

However, it is courageous to make a settlement even though we know that it will cost us money.

Keep holding a position without losing losses is a great risk, and it is a point that many people worry and fail in FX.

If you are unsure when to make a settlement, we recommend that you decide on a stop loss line so that you do not lose a lot.

There is a method of making a decision based on the ratio of the loss to the funds, for example, “Settle when the unrealized loss of 2% of the funds is reached”.

#### 3. Deposit more money or cut losses

Depending on the Forex company, there is a service that issues a warning (margin call alert) at a certain point when the margin maintenance rate loss approaches the stop out line.

It is also called “margin call (additional margin, additional margin system)” because it is a warning that additional margin to the account is required to continue holding the positions opened.

Using these alerts as a guideline to make additional deposits or stop losses is also a useful method to avoid stop out.

Margin call alerts are usually sent by email, so make sure that the address you set is something that you can check frequently.

Also, depending on the company, there are cases where there is no margin call or stop out alert.