What is leverage's impact on stop out?

Within forex, a sudden stop out can be an incredibly frustrating thing to happen. However, risk management techniques can help you test various trading conditions in order to be better prepared. Let’s look at how your leverage impacts your stop out and how you can better control this.

How does stop out work?
When your margin level (more on this later) reaches a certain percentage, in most cases 0%, Stop out automatically closes that position. Margin call, which is similar except that it doesn’t automatically close your positions and only warns you of your position’s downturn, will occur sooner at 60% margin level.

What is the margin level?
The margin level is a percentile that tracks both your margin and your equity, and it is calculated:

Margin level = Equity/Margin x 100

So, if your equity is USD 1000 and your margin is USD 100 your margin level will be 1000%.

1000/100 x 100 = 1000%

So when this percentile hits 0% stop out automatically closes your positions, starting with the least profitable one. It will only stop closing positions when doing so results in a margin level above the amount set as stop out.

When would stop out occur?
At the time I place the order, my margin level is calculated this way:

1000/40 x 100 = 2500% (the margin level is 2500%).
But now my position starts falling, and my equity drops accordingly; let’s say to USD 500.

500/40 x 100 = 1250% (the margin level is now 1250%).
Still not enough to cause stop out, but the margin level has been halved. Bad news, the position has taken a major downturn and your equity falls to USD 1.

1/40 x 100 = 2.5% (the margin level is now 2.5%)
Still not enough to trigger stop out, but very close. Your position goes into the red and your equity now stands at USD 0.

0/40 x 100 = 0% (the Margin Level is now 0%).
Stop out occurs immediately and this position will be liquidated automatically.

What about leverage?
Leverage changes the initial held margin amount as well as your equity, and it’s there that it can impact stop out. Leverage is a means by which a trader’s buying power is enhanced by a set rate: 1:200, 1:500, etc. 1:200 meaning that for every USD 1 you put into your Margin, it will be magnified by 200. This is useful for trading large volumes with little Margin, but with it also comes a higher potential risk as positions tend to be more volatile.

The margin level is where leverage and stop-out meet.

The volatility is key here.

The higher the leverage, the lower your margin, the more responsive to change your position is.
The lower the leverage, the higher your margin, the less responsive to change your position is.