Stop Out
A stop out is the automatic, forced liquidation of one or more open positions by a broker when a trader's account equity falls to or below a specified percentage of the required margin, known as the stop out level.
Quick Definition Box
A stop out occurs when your account equity drops below the broker's minimum margin threshold, triggering automatic position closure to prevent your account from going into negative balance. It is a protective mechanism for both the broker and the trader, but it usually results in realized losses. The stop out level is expressed as a percentage (e.g., 50%) of the margin required to keep positions open.
Detailed Explanation
To understand a stop out, you must first grasp the concept of margin. When you open a leveraged position in forex or CFDs, your broker requires a deposit — the margin — to cover potential losses. This margin is a fraction of the full trade size. For example, with 1:100 leverage, a $1,000 margin controls a $100,000 position.
Your account equity is the current value of your account: balance plus or minus floating profit/loss on open positions. The broker continuously monitors your equity relative to the margin required for your open positions. This ratio is called the Margin Level:
Margin Level (%) = (Equity / Used Margin) × 100
Each broker sets two critical thresholds:
- Margin Call Level (e.g., 100%): A warning. You cannot open new positions, and the broker alerts you to deposit more funds or close trades.
- Stop Out Level (e.g., 50% or 20%): The point of no return. The broker begins closing your positions automatically, usually starting with the largest losing trade, to bring your margin level back above the threshold.
The stop out is not a single event that closes everything at once. The broker closes positions one by one, recalculating the margin level after each closure, until the level is above the stop out threshold. If your equity is still insufficient after all positions are closed, your account may go into negative balance (though many brokers offer negative balance protection).
The stop out level varies by broker and instrument. For forex, it is commonly 50%, but some brokers use 20% or even 0% (which means positions are closed only when equity reaches zero). For CFDs on indices or commodities, the level may be higher due to wider spreads and volatility.
Real-World Example
Let's make this concrete. Suppose you have a $10,000 account and you open a position on EUR/USD with a notional value of $200,000. Your broker requires 1% margin, so the used margin is $2,000.
Your broker's margin call level is 100%, and the stop out level is 50%.
Step 1: Initial state
- Balance: $10,000
- Used Margin: $2,000
- Floating P/L: $0
- Equity: $10,000
- Margin Level: ($10,000 / $2,000) × 100 = 500%
Step 2: Market moves against you The EUR/USD drops, and your floating loss reaches -$8,000.
- Equity: $10,000 - $8,000 = $2,000
- Margin Level: ($2,000 / $2,000) × 100 = 100%
You receive a margin call. You cannot open new trades. You have two choices: deposit more money or close the position.
Step 3: Loss deepens You don't act, and the loss grows to -$9,000.
- Equity: $10,000 - $9,000 = $1,000
- Margin Level: ($1,000 / $2,000) × 100 = 50%
This is your stop out level. The broker immediately closes your position, realizing the -$9,000 loss.
Step 4: After stop out
- Balance: $1,000
- Used Margin: $0
- Equity: $1,000
You lost 90% of your account. The stop out prevented a total loss, but the damage is severe. If the loss had reached -$10,000, your equity would be $0, and the broker would close the position at zero — a complete wipeout.
Why It Matters for Traders
The stop out is the final safety net in your trading account. It exists to protect the broker from bearing your losses, but it also protects you from owing more than you deposited (in most jurisdictions). However, relying on a stop out as a "strategy" is a catastrophic mistake.
Understanding your broker's stop out level is essential for position sizing. If you trade with high leverage and a small account, a modest adverse move can trigger a stop out. For example, with 1:500 leverage and a 1% margin requirement, a 0.5% move against you on a full-size position can wipe out your entire margin.
The stop out level also interacts with your drawdown tolerance. If your strategy has a historical maximum drawdown of 15%, but your stop out occurs at a 10% loss on your current position, your strategy is unviable without adjustment.
Moreover, the stop out is not a fixed point in time. During high volatility, spreads widen, and the price at which your position is closed may be worse than the stop out level. This is called slippage. In fast markets, your stop out may execute at a significantly worse price than the theoretical level.
Common Misconceptions
Misconception 1: "Stop out is the same as a stop-loss order." A stop-loss is an order you place to limit your loss at a specific price. A stop out is a broker-initiated liquidation based on your margin level. You control the stop-loss; the broker controls the stop out. A stop out can occur even if you have a stop-loss in place if the market gaps or if your stop-loss is too wide relative to your margin.
Misconception 2: "The broker closes all positions at the stop out level." Not necessarily. The broker closes only enough positions to bring your margin level back above the threshold. If you have multiple positions, the broker typically closes the one with the largest floating loss first. If that's insufficient, it continues closing others. You may be left with some open positions after a stop out.
Misconception 3: "A stop out means my account is zero." A stop out triggers when equity falls to the stop out percentage of used margin. If your stop out level is 50%, your equity is still positive (half of the used margin) when the first position is closed. However, if you have no free margin and the market moves violently, the final result could be near zero or even negative (without negative balance protection).
Related Terms
How XM Compares
XM, like most regulated brokers, provides a clear stop out policy. As of the knowledge cutoff, XM's standard stop out level for forex and CFDs is 50%, with a margin call at 100%. However, these levels can vary depending on the account type, the instrument, and the regulatory entity serving your region. XM also offers negative balance protection for retail clients in many jurisdictions, meaning you cannot lose more than your deposited funds. Always verify the current margin and stop out levels on XM's official website or in your trading platform's contract specifications, as these can change without prior notice.
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⚠️ Disclaimer: This glossary entry is educational. Forex/CFD trading carries high risk. This is not investment advice.
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