Direct answer
A worked example of stop out shows how an account can be closed (partly or fully) when equity drops and usable margin falls below a stop-out threshold set by the account provider. To be verifiable, the example must state assumptions for starting balance, entry price, position size, how equity changes with price, and how the provider defines the trigger.
Mechanism: the moving parts
Stop out is a risk-control mechanism used on leveraged accounts. While exact formulas vary by provider and account type, the basic mechanics can be described without market-specific data:
- Balance: what the account has before considering unrealized profit/loss.
- Equity: balance plus unrealized profit/loss on open positions.
- Used margin: margin tied up to keep the position open.
- Free margin / usable margin: equity minus used margin.
- Stop-out rule: if usable margin falls to or below a threshold (often expressed as a percentage ratio involving equity), the provider may close positions to reduce risk.
Assumptions for a worked example
Because providers differ, the example below uses explicit, simplified assumptions:
- One account, one long position.
- No commissions or swap for simplicity.
- No other open positions.
- The provider’s stop-out trigger is: usable margin ratio ≤ 20%.
- Used margin stays constant until liquidation begins.
- Equity changes with price moves linearly (a standard classroom approximation).
Evidence or example: one full numerical scenario
Assume:
- Starting balance = 1,000.
- Position = 1 lot of an asset where, under the simplification, 1% adverse price movement causes a 100 loss in account currency.
- Initial entry is the current reference price; the account starts with no unrealized P/L.
- Used margin = 600.
- Stop-out trigger: usable margin ratio = (equity − used margin) / equity.
Step 1: Start state
- Equity = balance + unrealized P/L = 1,000 + 0 = 1,000.
- Usable margin = equity − used margin = 1,000 − 600 = 400.
- Usable margin ratio = 400 / 1,000 = 40%.
- Since 40% > 20%, stop out does not trigger.
Step 2: Price moves against the position Suppose the price moves enough that unrealized P/L becomes −500.
- Equity = 1,000 − 500 = 500.
- Usable margin = 500 − 600 = −100.
- Usable margin ratio = (−100) / 500 = −20%.
- Since −20% ≤ 20%, the stop-out rule triggers.
Step 3: What could happen next (limitation of the example) The worked math shows when a trigger condition is met, but it does not specify the provider’s exact liquidation behavior. Common possibilities include:
- Closing the whole position,
- Closing part of the position, or
- Closing multiple positions in an account.
That behavior depends on provider rules, execution quality, and account structure, so you should treat the trigger point math as separate from the closure outcome.
Limitations and risks
- Provider-specific definitions: the trigger may be based on different ratios or margin terms, so your calculation method must match the provider’s policy.
- Execution differences: real trading has bid/ask spreads, slippage, and order timing. A liquidation may happen at a less favorable price than the example assumes.
- Costs and carry: swaps, commissions, and funding effects can change equity before the price move reaches the assumed loss level.
- Failure modes:
- Gap risk: sudden price jumps can move equity faster than expected, causing immediate stop-out.
- Multiple positions: correlations can accelerate losses across several trades.
- Variable used margin: if margin requirements change during the period, the “used margin constant” assumption can fail.
Verification or next question
To independently verify a stop-out calculation, define all inputs and match the provider’s rule:
- the stop-out threshold definition (which ratio and which terms),
- the method for equity changes (including costs if applicable), and
- the liquidation process (partial vs full, and whether multiple positions are considered).
If you share the provider’s stop-out rule wording (without needing live prices), you can plug in the same structure as above to create a worked example that aligns with that specific definition.