Several forex traders are not properly familiar with how to use margin call or stop-out levels and frequently ignore them in trading. A proper understanding of how margin call and stop-out levels work can help you perform better as a forex trader by minimizing your risk. If you are starting as a trader, is best to equip yourself with at least a basic understanding of these levels before you start trading. A margin call is an indicator the equity in your trading account has decreased below a certain value, and you need to deposit more money in your trading account. The stop-out level is when your margin level falls to a certain percentage at which all your open positions will be automatically closed.
Another common mistake by traders is that they treat stop-out level and margin call as the same. This can be detrimental to your performance as a trader. For example, if you set up margin at 100% without any stop-out level, that means if your margin calls drop below 100%, the broker will automatically close your position. In another example, if you have set up a stop-out level at 20%, the broker will warn you that your position will be automatically closed at the best available price if your position drops below 20%.
The examples above show that the margin call can be used in two different ways depending on the broker. If there is a separate stop-out level set up, your broker will send a warning that your position has dropped below margin level percentage, and you don’t have any equity to support your position. On the other hand, if there is no separate stop-out level set up, the broker will automatically close your position for all your open trades until your margin call level is reached.
Setting up a separate margin call and stop-out level allows traders to receive a “warning shot” to alert them that their trading position will be automatically closed unless they take some action. The “warning shot” provides the traders more time to manage their trading position before any automated action takes place. Another key advantage of having a separate margin call and stop out level is that reduces the risk of your account going in the negative.
As a trader, it is your responsibility to make sure your account meets the margin requirements. The broker has the right to liquidate your open positions if you do not meet this requirement. Keep in mind that margin calls and stop-out levels are reached due to overleveraging by the trader. You might be attracted to overleveraging as it increases your gains, but it also increases your losses. Any losses incurred can quickly add up to deplete your free margin in trading. So, the more leverage you use, the faster your free margin will get depleted.