The problem with a lot of trader is that, they do not look for the type of margin call and stop out levels used by their brokers or CFD providers. This is a vital thing to check for a trader, before starting to trade, in order to avoid detrimental consequences.
Few brokers have the tendency to consider a margin call and stop out as the same thing. They do not bother to notify you anything regarding the margin call and stop out and start closing your trades.
Supposedly, if a broker set his or her Margin Call Level at 100% with no distinct Stop Out Level and if your Margin Call Level drops below 100%, the broker will automatically close your position without prior warning.
There are brokers who deals with a Margin Call and Stop Out in a distinctive way. They handle a Margin Call as an early warning message regarding the risk of your position of being reimbursed Stop Out.
If a broker set the Margin Call Level at 100% and the Stop Out level at 20%, and if your Margin Level falls below 100%, you will receive a cautionary stating that you must close your trade or deposit more money or to take the risk of reaching the Stop Out Level. Similarly, if your Margin Call Level persistently falls and arrive at 20%, only then, your broker can close your position at the best available price.
A Margin Call Level can be either of the two, depending on the broker,
- Your broker will send a warning about your account equity being dropped below the necessary Margin Level percentage only if there is a particular Stop Out. Then there will be no equity to support your open positions any longer.
- Your broker will automatically close your trades from the lowest profitable one till the required Margin Level is fulfilled, if there is no separate Stop Out.
Suppose, you have received a Margin Call without knowing how it will work. Now, this is something different from the basic Margin Call Policy where you find the Margin call and Stop Level are same. There will be warnings. You will receive automatic liquidation.
You have to carefully ensure that your account fits the Margin requirements. And if not, your broker can either Stop Out any or even all of your open positions.
You must have an elaborate knowledge regarding the margin trading, how stop losses are used, appropriate position sizing and risk management in order to prevent Stop Out.