Stop loss capital management with Stop out -

This is one of the extremely simple but effective methods of capital management. It sets an absolute maximum loss that you incur in the worst case scenario. This method is usually for those who are not disciplined or traders use high leverage to trade. It is also especially useful for scalping traders. To apply this capital management method, you must first understand the concepts of stop loss and stop out. The concept of stop loss is too basic, but if anyone is still unclear, read the following article:

As for the Stop Out concept, many people may not know it so I will present it here.

What is stop out?

Stop out is the stop of a trade where the account decline reaches a limit set by the broker to limit the risk. This account decline is managed by the margin level. To better understand the margin and margin levels, read the following article: What is margin?

Note, this is the level set by the broker, regardless of whether the price has reached the stop loss level set by you or not. This is often the case when the trader uses too much leverage.

The broker then starts closing positions that are currently open. The order with the highest loss will be closed first. When an order is closed, it will increase your margin and thus maintain the open position of the remaining orders. However, if the market continues to oppose you, your margin level will continue to go down. When it reaches the level that the floor specified above, the floor continues to automatically close the order with the highest hole opening. Keep going until you close all orders if the market goes against you. At that time, your account was in a state of being "burnt", ie almost lost all money.

How does this capital management method work?

Very simple! For example you have 10 thousand usd to trade forex. You determine today (or a certain order) you are only allowed to lose up to 1000 usd for example. So you only deposit 1000 USD transaction account to trade, and keep 9000 USD to outside the account.

So where is that 9000 USD? Very simple! In your manager account, open 2 MT4 (or MT5) trading accounts. An account you open but not for trading, but only for keeping money, please deposit your 10 thousand usd there. The remaining account you will use to trade, transfer 1000 usd from the original account to this account for each transaction. By doing so, regardless of market fluctuations, no matter how undisciplined you trade, you will only lose up to 1,000 USD.

There are 2 reasons to use the Stop Loss capital management method with Stop Out

First: As you know, in order to manage risk, we have a stop loss order. But in a special case when the market is too volatile and creates gaps (prices), the price may jump over the stop loss you have set so that your loss may be more than expected. .

Monday: Not only against the risks of price fluctuations. What is more important is that you protect against the risks of undisciplined trading.

You have just read the article: "Method of capital management Stop loss is equal to Stop out".

Author: Pham Khuong

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