Why Smart Stop Out is Important
When trading CFDs, you are usually trading on what is known as a margin account. This means that you are not actually trading your own capital, instead, you are trading capital borrowed by your broker and your account deposits serve as a margin which can be used to cover potential losses.
In other words, based on your account’s leverage, the broker lends you capital equal to your account’s size times the leverage but expects you not to lose an amount higher than your account’s size.
For example, if your account’s balance is USD 1000 and your account’s leverage is 30, you can borrow up to USD 30000 from your broker to trader.
However, at any point in time, you cannot lose more than USD 1000. If you do, then the broker forcefully closes all your positions, since your margin account cannot cover for more losses. The action of forcefully closing an account’s positions due to lack of margin is known as a stop-outs.
Stop outs exist to protect the brokers. This happens because if your account’s margin cannot cover the losses of a trade, then the cost will be transferred to the broker. Hence brokers need to close their positions to prevent further damage.
Nevertheless, since the market is not perfect, it is not possible to guarantee a closing price for every position.
Hence if the broker waits for the entire margin of a client’s account to evaporate before closing the positions, then there is a great chance that the client's account will turn negative due to price slippage.
For this reason, stop-out levels have been introduced. A stop-out level is the level of the account’s equity over the used margin at which the stop-out is triggered. In cTrader, you will see the stop-out level on the footer bar of the application
A stop-out level is expressed in %. Below we will demonstrate an example of a stop-out.
Assuming the below conditions
Account balance: 500 USD.
Account equity: 500 USD.
Stop Out: 50%.
Margin Level: 100%.
Open position No.1: Buy 200,000 USDJPY.
Open position No. 2: Buy 50,000 USDJPY.
Once the price of USDJPY falls by more than 10 pips, the Margin Level will become less than 50% and trigger the stop out.
A typical stop-out will close your entire position, leaving you out of the market, since with the remaining balance it is not possible to reenter the market with the same volume.
To resolve this problem for traders, cTrader introduces a unique feature called Smart Stop Out.
With Smart Stop Out, when the stop out level is reached, cTrader will partially close the position which uses the most margin. Doing this will keep the Margin Level just above the Stop Out level.
This logic will only close what is absolutely necessary by shaving off part of the position in the smallest possible increments, depending on how much margin needs to be released.
Taking the above example, when the stop-out level is reached, cTrader platform will partially close the largest position (Position No 1), in order to free the required Margin amount. The position of 200,000 USDJPY will be modified into 198,000 USDJPY by selling 2,000 USDJPY.
This way cTrader allows you to stay in the trade, utilizing all the available margins, and taking full advantage of a potential price reversal.
The Smart Stop Out feature is a feature that protects traders and it is in line with cTrader’s philosophy of Trader’s First.
Risk warning: *Your capital is at risk. Our products are traded on margin and carry a high level of risk and it is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved.
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