cTrader Stop Out Methods Explained

cTrader Stop Out Methods Explained

As a trader, you should already be familiar with the concept of “Stop Out”. If you’re not, you’re not ready to start trading yet. Stop Out is an event that happens if your margin falls below a certain threshold. When your trading accounts free margin falls below this level your broker will start closing your positions. The level at which this happens is controlled by your broker and does vary from broker to broker. In our cTrader Broker reviews, leverage is one of the factors we take into consideration. cTrader Stop Out is almost always an automated process that is performed by the trading platform itself and not by your broker’s employees.

While all Forex and CFD brokers do this, it’s how they do this that is important. Not all trading platforms Stop Out accounts the same way. cTrader supports two Stop Out methods, which are totally different to the way other popular trading platforms such as MT4 and MT5 do it. The Stop Out methods supported by cTrader are called Smart Stop Out and Fair Stop Out. The method which is used in your trading account is selected by your broker.

About the Examples in this Article

In the examples of this article, we assume you already understand the basic concepts of Forex and CFD trading. We compare the behaviour of each logic when there are two positions open which consume different amounts of margin.

We like to keep examples simple so you can focus on the concept, not the calculation. Unless it’s necessary for the explanation, we skip factors such as spread, commissions, swaps etc.

cTrader Smart Stop Out

Smart Stop Out is the most recently introduced Stop Out method in the cTrader platform. This method was introduced in November 2016 and it’s the most advanced of the two option.

With Smart Stop Out, when 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 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.

Smart Stop Out Example

Account Characteristics web there are no open positions 

  • Balance: $1500
  • Equity: $1500
  • Margin Used: $0
  • Free Margin: $1500
  • Leverage: 1:200
  • Smart Stop Out: 50%

If this account then opens two Buy positions USD/CHF at the entry price of 0.95000:

VolumeDirectionSymbolMargin Entry PricePip Value
Position #120,000BUYUSD/CHF1,000 USD0.95000$1.90
Position #210,000BUYUSD/CHF500 USD0.95000$0.95

These two positions use 100% of Free Margin. Over time, the price of USD/CHF drops by 263.2 Pips to 0.92368. This will cause unrealized P&L of $750.12. Margin Level now becomes 49.99% and is less than 50%. This triggers Smart Stop Out.

In the case of Smart Stop Out, Position #1 will be selected to be partially closed since it’s the position using the most Margin. Smart Stop Out will close the position in increments of 1,000 (0.01 Lots). This is the minimum amount that can be closed.

Position #1 is reduced by 1,000 units when closing part of the position a sell deal is required and this causes some P&L to be realized. The loss of 1,000 USD/CHF @ 263.2 Pips @ $0.095 per Pip will be $25.00. Even though the balance of the trading account has been reduced by $25.00, the amount of margin that was made available has been made available is $50. Because of this process, the Margin Level of the account is 51.72%

Now the characteristics look like this;

  • Balance: $1475
  • Equity: $749.88
  • Margin Used: $1450
  • Free Margin: -$700.12
  • Leverage: 1:200
  • Smart Stop Out: 50%

cTrader Fair Stop Out

This stop out method was added to cTrader way back in October 2014. When the Fair Stop Out logic is being used the position which blocks the most margin is closed first. If needed, the remaining positions will continue to be closed in order of greatest margin used. This logic doesn’t care if the position is profitable or not. Simply what will help to return margin to maintain the remaining positions and increase the chance of bouncing back.

Fair Stop Out Example:

Fair Stop Out is much simpler to explain. Considering the same scenario as was presented above for the Smart Stop Out example, cTrader would close Position #1 entirely. In doing so, this will return the most margin possible from closing a single position. But, it may be more margin than you need to maintain your other positions and it realizes all of the losses.

Position #1 is closed completely and this causes the P&L to be realized. The loss from 20,000 USD/CHF @ 263.2 Pips @ $1.90 per Pip will be $500.08. As the balance of the trading account has been reduced by $500.08, the amount of margin that was made available has been made available is $50. Because of this process, the Margin Level of the account is 149.98%.

In this case, the account characteristics will look like this:

  • Balance: $999.92
  • Equity: $749.88
  • Margin Used: $500
  • Free Margin: -$249.88
  • Leverage: 1:200
  • Smart Stop Out: 50%

The MetaTrader 4 Stop Out Method

In the MetaTrader 4 platform, the platform starts by closing the most unprofitable position in its entirety without consideration of any other factors. Closing a position which is causing the greatest loss for the trading account does nothing to help protect the accounts margin and the other open positions. Therefore, other positions will continue to be closed and is likely to continue until all positions are wiped out and the account goes bust.

For example, if you have a trading account which has leverage of 1:500 and the currency of the account is in EUR. If you have the following two Short positions for EUR/USD and the current market price is 1.15700

VolumeSymbolMargin Entry PricePip ValueP&L
Position #11,000EUR/USD2 EUR1.16500$0.10-$80.00
Position #2100,000EUR/USD200 EUR1.15720$10.00-$20.00

As you can see from the two positions, Position #1 is the biggest loser of the two, yet closing it would only restore 2 Euro of margin to the account and cause an $80.00 loss. Position #2 is much bigger, each point the market moves against the position causes an additional loss of $1. This position can do the most damage to the trading account, yet the MT4 Stop Out logic keeps it open.

Conclusion

Generally, when trading you should be on top of your positions and manage them is such a way that Stop Out doesn’t happen. You should not rely on the logic of the trading platform you’re using to close your positions when you can’t support them any longer. However, we’re not all perfect, mistakes happen as do things which are outside of our control. It’s still good to know what happens when this happens. It goes without saying that the cTrader methods used are much more favourable than MT4. Smart Stop Out is our favourite as it protects balance and that’s what’s most important.

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