What is the forced liquidation level? — A risk protection mechanism in Forex trading

2025-01-09
Terms, Learn Forex, Newbie

Understanding the difference between forced liquidation levels and additional margin is crucial for controlling Forex trading risks and protecting account funds.

What is the Stop Out Level?

The Stop Out Level refers to the specific percentage at which the broker will automatically close part or all of the open positions when the account's Margin Level falls to a certain threshold, in order to prevent the account funds from going into negative. When the Margin Level drops to the Stop Out Level, the trading platform will automatically start closing the most losing positions until the Margin Level is restored above the Stop Out Level.

Conditions for Triggering the Stop Out Level:

The Stop Out Level is usually a percentage set by the broker, such as 20% or 50%.
If your Margin Level falls below that percentage, the broker will start to automatically close positions to prevent further losses in your account.
The Stop Out process is executed automatically and cannot be manually intervened, aimed at protecting your account from having a negative balance.

How the Stop Out Works:

Automatic Closing: When the Margin Level reaches the Stop Out Level, the broker will start closing from the most losing trades until the Margin Level rises above the Stop Out Level.
Preventing Negative Balance: The main purpose of the Stop Out mechanism is to prevent the account balance from falling into negative, thus protecting investors from incurring unmanageable losses.

Example:

Assuming your broker sets the Stop Out Level at 20%, this means that when your Margin Level drops to 20%, the system will automatically start closing positions. Here is the specific calculation process:

Account Parameters:
Account Funds (Initial Balance): $1,000
Used Margin for Open Positions: $500
Floating Loss: $900

Equity Calculation:
Equity = Account Balance - Floating Loss
Equity = 1,000 - 900 = $100

Margin Level Calculation Formula:
Margin Level = (Equity / Used Margin) x 100%

Margin Level = (100 / 500) x 100% = 20%

When this situation occurs, the broker will automatically close positions to prevent you from incurring further losses.

Difference Between Stop Out Level and Margin Call:

Margin Call Notification:
When your Margin Level reaches a higher critical value (such as 100%), the broker will issue a Margin Call notification, reminding you to add funds or reduce positions.

Stop Out Level:
When the Margin Level further drops to the Stop Out Level set by the broker (such as 20%), the broker will automatically close positions without issuing any further warnings.

Conclusion:

The Stop Out Level is a protective mechanism. When the account funds are insufficient to maintain open positions, the broker will automatically close positions to avoid greater losses. Understanding and managing the Stop Out Level can help you better control risks and protect your account funds.

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