Stop Out - How to Avoid Forced Closing of the DealsWednesday, 2 August 2017 08:25
Stop Out is a position forcibly closed by a broker. It happens when the deposit amount falls below the allowed minimum, or when the deposit is completely lost.
A broker can close your transaction if the funds on the deposit are insufficient to cover the loss from the deal. As a rule, this is due to the fault of the traders themselves, who don’t set the stop orders, nor adhere to the rules of money management, open the deliberately risky transactions, or interpret the situation on the market in the wrong way.
How Does the Stop Out Works?
The broker monitors the deals opened by traders and determines the loss-making ones among them. In this case, traders risk not only their funds but also the broker's money, which they received through the leverage.
At the same time, providing funds to the trader, the broker takes from him the amount of the pledge, which is expressed as the ratio of the lot size to the leverage.
A broker also holds the sum called margin. Margin size may vary from 10 to 50 percent of the pledge amount. Most often a twenty percent margin is used. In the case, a trader opens a losing position this amount is taken from his account.
Let the amount on the account be $ 4,495.00, with a pledge of $ 346.00. The margin will be equal to the ratio 4 495/346, which is 1 299%. Consider a situation in which the margin level will fall to less than 20%:
0.2 * 346 = 69.2
It means that the broker will close your deal if the amount of your trading account is less than $69.20.
To prevent losses, brokers can apply a Stop Out in advance, until the amount on your deposit becomes insufficient for the further trading.
Transactions also can be closed if their expiration date has expired.
If the margin level becomes less than 30%, the Stop Out order works automatically, and the trader can lose up to 90% of his deposit.
How to Avoid Forced Closing of the Transactions?
As already mentioned above, traders cause such deplorable consequences themselves. To prevent the termination of the trade, you need to pay attention to the proper selection of strategies and technical tools. Never rely solely on a single indicator, determining entry points to the market. Remember that any instrument gives false signals sometimes, so check the signals of the indicators.
If you see that many deals are closed with a loss, stop trading. Pause, analyze your decisions. Perhaps it's worth changing the strategy.
Be sure to use the Stop Loss orders or trailing stops. You shouldn’t open your positions thoughtlessly. Adhere to the simplest rules of money management. Try to keep the ratio of possible profit to losses of 3 to 1, or at least 2 to 1.
Watch the amount on the deposit and determine the maximum amount that you can lose.
If you suffered a loss, do not try to recoup. It is always better to take a break and analyze your actions to take avoid such mistakes in future.