What is Stop Out and Margin Call? How to calculate forex funds
The concepts of Margin call and Stop out: what it is and how to use it in trading. Practical calculation examples. Risk management model for predicting account levels
Margin calls and Stop out are one of the trading conditions that must be indicated in the description of the account.
A margin call is a notification from the broker about the need to replenish the account because the loss on open transactions is close to a critical value. If funds are not deposited and the loss continues to increase, transactions will be closed by the broker forcibly.
Stop out is a signal for automatic closing of transactions, which occurs when there is an insufficient level of funds to maintain open transactions on the account. Each broker prescribes% of this level in his agreements and it may differ.
Monitoring the level of the account is one of the mandatory rules of risk management. To optimize this process, professional traders often create models to assess the level of acceptable drawdown for given leverage and position volume. You will read about how to create models such as calculating the level of accounts and how to manage leverage in this review.
Margin Call and Stop Out: the essence and rules of calculation
Terminology is the first thing a trader should get to know before trying his hand at Forex. Without it, not only successful earnings are impossible, but also simply interaction with a broker. Beginning traders in most cases for some reason believe that it is enough to download the strategy from the Internet, do everything exactly according to the recommendations on the demo account, and you can start “knock off the money”.
Buttons such as “I have read, understand and agree to the Terms” are clicked automatically. Traders simply ignore such a thing as an “offer”, where all trading conditions for each type of account are registered. This may ultimately lead to losses and misunderstandings between the broker and the trader. Today I will introduce you to two important terms, “Margin call” and “Stop out”, the parameters of which are always indicated by brokers in the trading conditions of the account.
In this review you will learn:
- What is Margin Call and Stop Out with practical examples, I have already given the definitions above.
- How to build a model that allows you to control the level of acceptable quotes and how to use it in trading.
- How to prevent the closure of Stop Out positions.
Margin Call and Stop Out: how not to be left without a deposit at the most inopportune moment
This story happened on December 30, 2015. At this pleasant New Year’s time, a time when miracles happen and you want to make new magical desires, a private trader named Denis Gromov also hoped for a miracle. Otherwise, it is difficult to explain the fact that in just 4.5 hours he managed with a deposit of 5.6 million rubles to crank more than 5 thousand transactions in currency pairs to 42 billion rubles. Later, the 38-year-old trader himself will tell that he did not understand what happened. After all, the dollar was growing and making money on the exchange – this was the best option in terms of margin costs. The result turned out to be sad: having completely lost the deposit, he was left to the broker another 9.5 million rubles.
At that moment, the manager of the broker called him and informed about the occurrence of the so-called margin stake and suggested: “to reduce the amount of borrowed funds by performing reverse transactions.” The trader’s mistake turned out to be simple: the cost of arbitrage trading was not taken into account (operations with the same assets at the same time in order to profit on the price difference). Any leverage allows you to increase the volume of the transaction, for which, when transferring to the next day, a fee is charged for transferring an open position to the next day (swap). Transactions on USDRUB _TOD were carried out on December 31, while transactions on USDRUB_TOM – only January 11th. For all these days off, the trader should have been charged with a swap, which turned out to be more than the trader’s deposit. This is precisely what the broker’s manager told the unlucky trader who had only to close open deals at a loss.
Attempts to solve the problem through the courts did not lead to success, but this story was a prime example of what the lack of understanding of terms such as “margin trading”, “margin call” and “swap” can lead to.
You should not be afraid of leverage, any tool in the hands of a professional can make a profit. What leverage to choose – an individual choice of each and there are no single recommendations here. Strict adherence to risk management and control of unprofitable positions is one of the most effective methods to prevent a stop out. If you saw inaccuracies in the article or if you want to add something, I’m waiting for your comments!