Margin Call and Stop Out are two widely used tools among brokers. In fact, it can be said that all brokers offering a certain level of quality provide these tools. They act as a
guarantee for both the trader and the broker, even though they may be perceived as limiting. The reasons for this perception can be traced back to the very nature of Margin Calls and Stops, and especially to the reason why they were invented.
In the following article, we will discuss Margin Calls and Stop Outs, explaining their function, how they are calculated, and why they are so important.
What are Margin Calls and Stop Outs
In a nutshell, both Margin Call and Stop Out are tools through which the broker
prevents the trader from going into the red. That's right, the possibility of going into the red when trading exists, and in some cases, it is not a rare occurrence. It happens, specifically, when operating with leverage. Leverage is a tool through which it is possible to invest a larger sum than what is actually available. If you only have 1,000 euros, it is possible to produce an investment worth 100,000 if you use a 1:100 leverage. In this way, any profits will be calculated as a percentage not on the 1,000 but on the 100,000. Obviously, the same applies to losses. Hence the risk of going into the red.
Being in the red is a catastrophe for the trader, but it is also a catastrophe for the broker. Therefore, they implement Margin Calls and Stop Outs to prevent this from happening.
Specifically, the broker issues a Margin Call when losses reach the guard level, providing a simple warning.
The broker invites the trader to close losing positions.
The Stop Out, on the other hand, occurs when the guard level has been exceeded, and losses have reached an already intolerable level. The broker, therefore, causes a forced exit from positions with heavy losses.
How Margin Calls and Stop Outs are calculated
Margin Calls and Stop Outs occur when losses reach a certain level, called the Margin Level. Obviously, the Margin Level related to Margin Calls is higher than the Margin Level related to Stop Outs.
Brokers can independently decide their own Margin Levels. In fact, this is one of the criteria (among many) by which the trader chooses one broker over another. This is also because the Margin Call and Stop Out policy provides insight into the broker's level of strictness or prudence.
On average, however, the Margin Call is activated when the equity reaches 60% of the margin. The Stop Out, on the other hand, is activated when the equity reaches 30% of the margin.
Incidentally, the margin is calculated by multiplying the asset value at the opening by the bed value, and finally dividing by the leverage used.
Why Margin Calls and Stop Outs are necessary
Margin Calls and Stop Outs are seen as a limitation. In fact, they are. After all, they prevent
something. Specifically, they prevent the trader from going into the red. A noble and sacrosanct intent, both from the trader's point of view and from the broker's point of view.
Setting Margin Calls and Stop Outs, perhaps at high levels, is not a quirk.
It is an organic necessity. This is especially true when the broker provides high leverage, greater than 1:10. Leverage, in fact, is a double-edged sword. It is an exceptional profit multiplier. At the same time, however, it can cause substantial losses, and in some cases, it causes catastrophic losses.
Therefore, Margin Calls and Stop Outs represent
the price to pay to be able to use leverage, and particularly high leverage. In fact, it is good to welcome a restrictive Margin Call and Stop Out policy, as in its presence, the trader can never "irreparably harm" themselves.
Some brokers, in fact, propose a prudential approach and set Margin Calls and Stop Outs at high levels,
far from the concept of being in the red. In this way, two birds are killed with one stone: the broker can offer high leverage, and the trader cannot materially generate dramatic losses.
Among the brokers that are part of this school of thought,
Key To Market stands out. Among the best brokers overall, it is appreciated for the breadth of its offering, the accessibility of its economic conditions, and for its ability to stand by its clients, intercepting their implicit and explicit needs. Its Margin Call and Stop Out policy is proof of this.
