Stop-Out – How does it work?
Stop-Out is the final solution used by brokers when our investments turn out to be wrong and we record an increasing loss. It is another mechanism following Margin Call. In practice, it protects us from an account debit. When the balance falls below a certain level set by the broker, it automatically comes to closing the position at the market price. Depending on the brokerage, all open positions may be closed at the same time, or they will be closed one by one, starting with the most losing one, until the ratio of the account balance to the capital involved in the transactions is equalized.
Example:
Margin Call at our broker is 150% and Stop-Out is 40%. We open a position that requires a margin of PLN 200, and our account balance is PLN 1000. If the market goes in the opposite direction, resulting in a loss on this trade of PLN 700, the operating balance of our account (equity) will be PLN 300, or 150% of the required margin. We will be called upon to replenish the account. However, if the loss deepens too quickly, or we simply do not replenish the account, our balance may fall to the stop-out level of PLN 80 (PLN 200 x 0.4), and the broker will start closing our positions to avoid further losses.
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