What Is a Stop Out in Trading? Automatic Liquidation
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A stop out in trading occurs when a broker automatically closes one or more open positions because account equity falls below the required margin threshold. Under FCA rules, retail CFD providers must apply margin close-out protection at 50% of the required margin, although brokers may close positions earlier.
A stop out in trading happens when a broker automatically closes one or more open positions because the account no longer has enough equity to meet its margin requirements. It is a risk control measure designed to limit further losses, although it cannot guarantee that traders will retain any of their remaining capital.
Margin trading lets you control positions larger than your initial deposit, but it also increases your exposure to losses. When the market moves against an open position, account equity falls and the margin level may eventually reach the broker's stop-out threshold.
This guide has the stop out explained step by step: how it works, how it differs from a margin call and why market conditions can affect execution when you trade leveraged products.
Quick Takeaways
- A stop out occurs when a broker automatically closes open positions after an account reaches its margin close-out threshold.
- The margin level measures account equity as a percentage of the margin required to maintain open positions.
- Under UK Financial Conduct Authority (FCA) rules, retail CFD providers must apply margin close-out protection at 50% of the required margin, although they may close positions earlier.
- Stop outs do not guarantee an exact closing price, particularly during periods of high volatility or market gaps.
What Is a Stop Out?
Stop out meaning in brief: it is the automatic closure of one or more open positions when a trading account reaches its broker's margin close-out threshold. Unlike a planned exit, a stop out is triggered by the broker's risk management system when the account can no longer support its open positions.
To understand what causes a stop out, it helps to know four key account terms:
- Account balance: The amount of money in a trading account after completed trades and applicable charges have been accounted for, excluding unrealised profits and losses from open positions.
- Equity: The current value of the account, including unrealised profits or losses from open positions.
- Used margin: The amount of capital required to maintain existing leveraged positions.
- Free margin: The difference between account equity and used margin. It indicates how much equity remains available beyond existing margin requirements.
When open positions lose value, account equity and free margin decrease. If the account reaches the broker's stop-out level, the broker may automatically close positions to reduce the account's margin requirements.
A stop out is therefore a safeguard against further losses rather than a substitute for managing trading risk.
How Does a Stop Out Work? The Margin Level Formula
A stop out is generally triggered when an account's margin level falls to the threshold specified by the broker.
The margin level shows the relationship between account equity and used margin, expressed as a percentage.
Margin Level (%) = (Equity ÷ Used Margin) × 100
A higher margin level generally means the account has more equity available relative to its margin requirements. As unrealised losses increase, equity falls and the margin level decreases.
For retail CFD accounts covered by FCA rules, brokers must apply margin close-out protection when net equity falls below 50% of the margin required to maintain open positions. Brokers may also set a higher closing threshold.
The rule applies at account level rather than requiring each individual position to reach a separate loss threshold.
Example: Calculating a 50% Stop-Out Level
Consider a hypothetical retail trading account with the following details:
- Account balance: $2,000
- Leverage: 1:30
- Position size: $30,000
- Used margin: $1,000
The trader opens a position worth $30,000 using $1,000 in margin.
If the market moves against the position and produces an unrealised loss of $1,500, account equity falls to:
Equity = $2,000 − $1,500 = $500
Using the margin level formula:
Margin Level = ($500 ÷ $1,000) × 100 = 50%
In this example, the account has reached a 50% margin level, which is also the broker's assumed stop-out threshold. If equity falls further, it will fall below the FCA's regulatory margin close-out threshold, although the broker may close positions earlier.
The broker may close the position automatically, subject to its terms and market conditions.
If the position closes at the assumed price, with no additional trading costs or slippage, the account would retain approximately $500.
However, the actual remaining balance may differ because of price movements, execution conditions and trading charges.
What Happens When a Stop Out Is Triggered?
The precise liquidation process depends on the broker and trading platform.
A typical sequence may involve:
- Margin level falls: Account equity declines relative to used margin and reaches the broker's stop-out threshold.
- The broker identifies positions for closure: Its risk management system determines which open positions to close.
- One or more positions are closed: The broker reduces the account's exposure and margin requirements.
- Margin level is recalculated: The system checks whether the remaining equity is sufficient to support any positions still open.
- Further positions may be closed: If the account remains below the required threshold, additional positions may be liquidated.
Some brokers close the largest losing position first, while others use different methods.
The FCA's margin close-out rules do not require brokers to follow a particular order when closing positions.
Closing a position releases the margin allocated to it, but it does not reverse the trading loss. The account's remaining equity still reflects the realised loss and any applicable charges.
Margin Call vs Stop Out: What Is the Difference?
A margin call is a warning that a trading account is approaching or has reached a margin threshold set by the broker. A stop out occurs when the broker automatically closes positions because the account has reached its margin close-out level.
The main difference is that a margin call alerts traders to a potential problem, while a stop out involves the closure of open positions.
A broker may issue a margin call when the account's margin level falls to a specified percentage. Depending on the broker's terms, the trader may need to deposit additional funds or reduce open positions.
However, not all brokers use the same margin call threshold, and a warning may not arrive before a stop out occurs.
For example, one broker might issue a warning at an 80% margin level and apply a stop out at 50%. These figures illustrate how the two stages can work, rather than representing universal industry standards.
Feature | Margin Call | Stop Out |
|---|---|---|
Primary function | Warns of insufficient margin | Automatically reduces or closes open positions |
Threshold | Set by the broker; 80% is one possible example | 50% regulatory close-out protection for FCA-regulated retail CFDs, with earlier closure permitted |
Action taken | May involve a warning, a request for funds or restrictions on new positions | Broker closes one or more positions |
Trader impact | May provide an opportunity to reduce exposure or add funds | Positions are closed without requiring the trader's approval |
Can a Stop Out Happen Without a Margin Call?
Yes. A stop out can occur without a trader receiving or acting on a margin call.
For example, a sharp market movement may cause an account's margin level to fall from 90% to below 50% before the trader has time to respond.
Even when your broker sends margin call notifications, a delay in receiving or reading one may leave you little time to act.
That's why you shouldn't rely on margin call alerts as your main way of controlling risk.
Why Market Gaps and Slippage Matter During Liquidation
A stop out is designed to reduce further losses, but it does not guarantee that a position will close at the exact price associated with the margin threshold.
During major economic announcements, periods of low liquidity or market openings after a weekend, prices can move sharply.
In some cases, the market may gap from one price to another without trading at the levels in between.
If a trader holds a long position and the market gaps lower, the broker may only be able to close that position at the next available executable price.
This can result in slippage, which is the difference between the expected execution price and the price at which an order is actually filled.
For example, a position might reach its stop-out threshold when the underlying asset is priced at $100. However, if the next available execution price is $97, the resulting loss could be greater than expected.
Severe slippage can exhaust the remaining equity in a trading account and may temporarily result in a negative balance.
Does Negative Balance Protection Apply to Stop Outs?
For retail CFD accounts covered by FCA rules, negative balance protection limits a client's losses to the funds in their CFD trading account.
This protection is intended to prevent retail clients from owing additional money to the broker when losses exceed the available account funds.
The European Securities and Markets Authority (ESMA) also established account-level negative balance protection as part of its retail CFD product intervention measures.
However, the protection does not guarantee that traders will retain any of their deposited capital. A trader can still lose all the funds in the relevant CFD account.
It is also important to check the account's regulatory status. Professional clients and traders using brokers outside the relevant regulatory frameworks may not receive the same protection.
How Can Traders Reduce the Risk of a Stop Out?
Reducing the likelihood of a stop out starts with managing position sizes, leverage and account exposure before opening a trade.
The following practices can help traders maintain sufficient margin and manage potential losses.
1. Use Stop-Loss Orders
A stop-loss order instructs the trading platform to close a position when the market reaches a specified price.
Setting a stop loss can help limit losses before the account approaches its stop-out threshold.
However, standard stop-loss orders do not guarantee execution at the requested price. Slippage and market gaps can result in a less favourable closing price.
2. Keep Effective Leverage Manageable
Higher leverage allows traders to control larger positions with less initial margin, but it also increases the effect of price movements on account equity.
Using less than the maximum leverage on offer can give you a larger margin buffer.
The appropriate level of leverage depends on the market, position size, account capital and the amount of risk a trader can afford to take.
3. Monitor the Account's Margin Level
Checking your margin level regularly shows you how much equity is left relative to your open positions.
This is particularly important when holding several trades at once.
Positions in correlated markets may lose value at the same time, causing account equity to fall more quickly than expected.
4. Maintain Sufficient Free Margin
Keeping a portion of account equity available as free margin can help absorb adverse price movements.
Rather than committing most of the account's capital to margin requirements, traders can consider smaller positions and limit their overall exposure.
There is no single percentage of used margin that guarantees protection against a stop out. The appropriate buffer depends on market volatility, position sizes and the broker's margin requirements.
Conclusion
A stop out in CFD trading occurs when a broker automatically closes one or more positions because the account has reached its margin close-out threshold.
For FCA-regulated retail CFD accounts, the regulatory close-out requirement is based on 50% of the margin needed to maintain open positions, although brokers can apply a higher threshold.
Understanding margin levels, using appropriate position sizes and maintaining sufficient free margin can help traders reduce the risk of forced liquidation. However, stop outs cannot guarantee a particular execution price or prevent the loss of all funds in a trading account.
For more information about how leverage affects margin requirements and trading risk, visit our Leverage & Margin guide.
FAQ
What Is the Difference Between a Margin Call and a Stop Out?
A margin call warns traders that their account is approaching or has reached a margin threshold set by the broker. A stop out occurs when the broker automatically closes one or more positions because the account has reached its margin close-out level. A margin call does not always occur before a stop out.
What Happens When an Account Hits the Stop-Out Level?
When an account reaches its broker's stop-out level, the broker may automatically begin closing open positions to reduce margin requirements. The order of closure depends on the broker's policy. If the margin level remains too low after a position closes, the broker may close additional positions until the account meets its margin requirements.
Does a Stop Out Guarantee My Trade Closes at the Exact Threshold Price?
No. A stop out does not guarantee execution at a specific price. During periods of high volatility or market gaps, positions may close at a less favourable price than expected. This is known as slippage and can result in larger losses than the trader anticipated.
Can You Lose More Money Than Your Balance During a Stop Out?
Severe market movements can cause losses to exceed the funds available in a trading account. However, negative balance protection for FCA-regulated retail CFD accounts limits a trader's liability to the funds in the relevant CFD account. This protection may not apply to professional clients or accounts outside the relevant regulatory framework.
How Is the Stop-Out Level Calculated?
The margin level is calculated as (Equity ÷ Used Margin) × 100. For FCA-regulated retail CFD accounts, brokers must apply margin close-out protection when equity falls below 50% of the required margin, although they may close positions earlier. Other brokers and account types may use different thresholds.
