A stop out level is the next stage after a margin call that leads to the liquidation of a trader's positions.
What Is a Stop-Out?
A stop out level is a specific percentage level to which your margin level falls, resulting in automatic closing (liquidation) of all your open positions by a broker until your ML gets back to normal. This liquidation is called a stop out. The reason for a SO is the inability of the trading account to support the open positions due to the lack of margin. The size of the used margin needed to maintain a position does not depend on the stop out. It depends on the trade size, leverage, and the broker's margin requirements.
Let's assume that your broker has set a stop out level at 10% and the margin call level at 20%. It means that you will get a margin call when your ML reaches 20% and your positions will be automatically closed if your ML reaches 10%. The stop-out releases the used margin that was locked up so that it becomes a free margin.
For example, if you had $1,000 deposited in your account and have a floating loss of $800, then you reach the margin call level of 20% because your account equity is now $1,000 - $800 = $200. However, if your floating loss grows up to $900, it means that you have reached the SO level of 10% ($1,000 - $900 = $100), so the broker starts closing all of your positions starting with the least profitable one. Closing of each position releases the used margin and thus increases the ML until it is above 20% again.
One more example: You have an account with a 50% MC level and 30% stop out level. With the balance of $10,000, you open a trading position with the $1,000 margin.
The loss reaches $9,500 -> account equity becomes $10,000 - $9,500 = $500 (50% of the UM) -> an MC is triggered.
The loss reaches $9,700 -> account equity becomes $10,000 - $9,700 = $300 (30% of the UM) -> the SO is triggered -> the losing position is automatically closed.
How to Prevent Stop Outs
If you want to minimize any bad outcomes for your trading account, you need to take certain measures in order to prevent the stop out. Here are some of them:
Do not open too many orders at the same time. If you do so, you will leave less equity as a free margin that can be used to avoid an MC.
Trade only what you can actually afford. Many successful traders only trade about 2.5% to 5% of their equity.
Use stop-loss orders to control your losses. Closing an unprofitable trade while still having some funds in your account to prevent the broker from closing your positions.
When approaching an MC, add more funds to your account, try changing your leverage to a higher one, and close unprofitable trades before the broker does it for you.
Use hedging strategies such as put options, contracts for difference, currency pairs, price fixing, averaging, arbitrage, and more.
A stop out is the action of closing the open positions by the broker in case the stop out level is reached. This level can be different depending on the broker or platform you are trading with. Closing the unprofitable positions result in the release of the used margin that is used to decrease the SO level.
There are several ways to prevent stop outs, such as:
Not to open too many orders at a time;
Trade only what you can actually afford;
Use stop-loss orders to control losses;
Use hedging strategies.
Before you reach a stop out level, you get a margin call as a warning.