Stop Out Explained When Trading Bitcoin and Cryptocurrencies
‘My Account blew up’. The dreaded realisation of any trader.
But fear not. If you have a sound understanding of how stop out works, you will have a good idea of how much the market can move against you while still being able to maintain your positions.
What is stop out?
Your account will get stopped out if you do not have enough available funds in your account to cover losses on open positions. It is triggered when your account’s margin to equity ratio falls below a predefined level, as set by your broker.
Your margin level is calculated as Equity / Margin x 100.
What is the difference between margin call and stop out?
Margin call is a warning that your account is low on funds and your positions may be automatically closed. You will be in margin call on the CryptoAltum MT5 platform when your margin level falls below 150%.
Stop Out is the action that closes your trades automatically. Your trades will be stopped out on the CryptoAltum MT5 platform when your margin level falls below 100%.
Stop Out Example
The best way to illustrate stop out is with an example, so here goes:
To keep our calculations simple, we will use an account with a deposit of 1,000 USD and trading 1 lot BTCUSD with 1:100 leverage.
At the time of writing, BTCUSD is trading around 63,900 USD.
So, with a leverage of 1:100 the margin requirement for this trade is 639 USD.
On opening the position, our account will look like this:
Balance: 1,000 USD
Equity: 980 USD (assuming we started with a 20 USD spread)
Margin: 639 USD
Free Margin: 341 USD
Positions with CryptoAltum will be stopped out when the margin level falls to 100%, and the margin level is 100% when the equity and margin are the same value.
Since the stop out is when the account equity is the same as our margin (639 USD) our position will be stopped out once our equity has dropped to 639 USD.
Currently our equity is 980 USD, so we have until it falls to 639 USD, which is 341 USD.
Since we’re trading 1 lot BTCUSD, every time the price moves $1, we have made/lost $1.
This means the market can move against us 341 USD before we get stopped out.
Simple, right?
We know it can be a bit confusing, but if you read the above example a few times things will become clear.
Understanding how things such as your margin, equity and margin level are calculated is crucial to any traders success. You can have a read of our How to Calculate Crypto Margin and Profit article, and keep the below table book marked for quick reference:
Does high leverage increase the risk of my account being stopped out?
If you are using high leverage to trade bigger positions, then yes, your account is more at risk of stop out.
Using the above example, if we have been trading 2 lots instead of 1, every time the market moves 1 USD we would have made or lost 2 USD.
So, while trading 1 lot would have allowed the market to move 341 USD against us before we got stopped out, trading 2 lots would only allow for a movement of 170.50 USD.
Using high leverage also reduces your margin, which leaves more free equity in the account which can potentially be lost to stop out.
For further reading on how leverage affects your margin check out our article Trading Cryptocurrencies with Leverage.
Why is the margin call/stop out level higher on CryptoAltum?
Due to the high volatility of cryptocurrencies pricing can move much more rapidly than traditional Fx pairs.
Due to these large movements, the stop out level must be set higher than usual to prevent the balance from going negative.
In the rare case the 100% stop out is not sufficient to prevent a negative balance, CryptoAltum provides guaranteed negative balance protection, so any negative balance is returned to zero immediately.
What happens when my account gets stopped out?
Once your margin level has fallen to 100% stop out is automatically triggered by the platform and your trade will be closed.
If you have multiple trades open, they will close one by one, starting from the least profitable trade. If the margin level returns above 100% due to the closure of some positions, stop out will halt.
Can I get stopped out if my positions are hedged?
Yes. it is still possible to get stopped out, even if your positions are hedged. Spread widening, financing fees and changes in the value of your MT5 base currency can all contribute to hedged positions being stopped out.
Can I avoid stop out?
Absolutely. By employing strict risk management strategies stop out is, for the main part, totally avoidable.
Make sure you:
- Monitor your account constantly when you have open positions
- Be ready to add funds to your account if necessary
- Make sure you understand how stop out is calculated
- Study the charts and get an idea of how the price moves. For example, if you’re trading Bitcoin, be prepared for the price to move up to 15% in a day!
- Keep your accounts exposure within reasonable limits
- Set stop losses on all your trades
CryptoAltum always recommends new traders to register for a demo account until they are confident with the basic workings of the platform. Demo accounts are quick and free to open, and involve no financial risk.
For more interesting tips and facts visit our Education Centre.
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