What is a stop out?

Stop out is an expression with two different meanings in different financial markets. In the foreign exchange market, it is the level at which all of a trader's positions are automatically shut because their margin has decreased to the point whereby it cannot support a continuing open position.

In other markets, it describes the fact that a security has reached the stop-loss level at which the trader ordered that it be sold. Once this has happened, the trader is described as "stopped out".

Where have you heard about stop outs?

You may have heard about both types of stop outs from investment guides or in discussions about how to minimise losses and maximise profits. In terms of the stop-loss triggered stop-out, Marketwatch's Michael Sincere has argued against the use of stop-outs, suggesting that they are triggered too often in fast-moving markets Stop-outs in the foreign exchange market are more of a niche subject.

What you need to know about stop outs.

The foreign currency market developed in parallel to the securities markets, so it is unsurprising that the same expression should have been used, very differently, by those trading in one or the other.

In the foreign exchanges, stop-out is an action taken by a broker in relation to a client whose margin is now inadequate. By contrast, the state of being stopped out in securities markets is the direct result of the trader's instructions having been followed.

There have been suggestions, in this second case, that market fluctuations have led to an excessive number of traders being stopped out.