What is a Stop Out?
A ‘Stop Out’ is a triggering of a forced automatic closing of a trader's positions in case that person's trading account equity falls below a certain threshold.
Margin level is displayed on the platform as a % anytime you have open positions, and is calculated as: Equity / Initial Margin *100
Equity means the balance + unrealised P&L in each trading account and does not inlcude any balance in your FxPro Wallet.
The Stop Out level is 50% across all our platforms and account types. This means that once your Equity falls to a value equal to 50% of your initial margin, stop out(s) will begin to occur.
So, with an initial deposit of $1000, and an initial margin of $100, you are left with a Free Margin of $900. If losses reach $900, you will have 0 Free Margin remaining, and your margin level % at this time would be 100% (100 equity / 100 Initial margin = 100%). If losses continue and eventually reach $950, the 50% Stop out would be triggered. (50 equity / 100 used margin = 50%)
Now that we have explained how the stop out is applied, let’s see an example at which price you would be stopped out.
You open a Buy position of 100 barrels of Brent Oil (0.1 lot) at a price of $55 per barrel. This position is using a leverage of 10 times (1:10) and you started with $600 in your account.
Initial margin is 1/10= 10% of the exposure. The exposure in this case is 100 barrels times 55= $5,500. So, your initial margin is 550, leaving $50 free margin.
The price starts to fall, and we want to find out at what price Equity will be equal to 50% of initiial margin. To do this, we need to calculate the price at which our loss will be 50% of 550 = 275, plus the free margin because as we explained in previous example above, losses are first used against free margin. So, the total loss would be 325 or 3.25 per barrel since our position is 100 barrels. When the price drops by 3.25 and reaches (50-3.25) $46.75, that is the BID price, you will be stopped out.
Stop Outs help to prevent trading accounts from falling into a negative balance, however, in very volatile markets, or during market gaps, it is not always possible to fill orders at a specific level and there might be significant slippage when Stop out orders are excuted.