A margin closeout is a condition when the broker closes some open positions automatically because the affected trading account has a limited free margin left to absorb further losses in trades. The open positions are closed to reduce the probability of decreasing more amount used as a margin from the trading account.
It is a situation when your margin closes out, the value falls below the level of your margin used, and then all your open positions in the market are closed. However, the open positions unavailable for trading at the time of margin closeout will be held open, and the trade market will manage your margin requirements.
But as soon as the trading becomes available on those open positions and your trading account is still under margin, another margin closeout will happen and close the remaining open positions.
Margin closeout MCO rule
The margin closeout rule determines the capacity of a trading account to hold positions. For example, suppose the trader’s account margin level falls below 50% of the margins required for the open positions to meet the margin requirement of the trader. In that case, the trade market will close one or more open positions to ensure that the margin level could not hit zero. Thus, there should be some amount left for absorbing the losses. MCO rule also puts the Stop Loss order rule and limited risk protection rule to the positions. But it does not restrict a trader to level up their account’s margin if they want to top it up.
The traders should know about the “margin closeout per cent” for successful trading. If the margin closeout per cent is close to 100%, it is more likely to occur.
How to calculate the margin closeout?
To calculate a margin closeout value, suppose that you have $1000 in your trading account and a long open position of $10,000 at a rate of 1.1200. If the current rate of the asset is 1.13200/1.13210, then the current midpoint rate of the asset is 1.13205. so the unrealized P/L of the trader’s account will be calculated by the current midpoint rate as
= (current midpoint rate – open rate ) × position size
= (1.13205 – 1.1200) × 10000
= $ 120.50
Then the trader’s account margin closeout value is expressed as
=1000 + 120.50
= $1120.50
What will happen with the margin closeout?
A trader is responsible for the margin closeout, and he should check his trading account margin level regularly and keep funding the account to open more positions in the market. Also, maintaining a sufficient margin level to ensure that margin closeout will not happen is a key for successful trading.
A margin close more likely happens when margin closes out value becomes half or less than the margin available in the account. The trading platform in which you have your trading account keeps warning you and sends you notifications that margin closeout will happen. The trading platform will alarm the trader first when the margin closeout value falls within 5% and then again alarm you when it falls within 2.5% of a margin closeout. The trading platform keeps updating the trader about the margin closeout per cent through email and push notification to ensure that the trader’s margin requirements fulfil the open position and do not approach the high-risk level.
Without the warnings, notifications, and emails from the trading platform, a trader should also continuously monitor the account’s margin level. A trader makes sure that his trading account is sufficiently funded to keep the margin available for absorbing trade losses. So the trader should be mindful and consider the margin closeout per cent to avoid margin closeouts.
How to avoid margin closeout?
Taking precautions before the margin closeout will happen is most important for the trader for successful trading. There are some actions discussed below that can be used by the trader to avoid the margin closeouts that are as follows
- Monitor the account margin closeout per cent regularly.
- Using low leverages, you will not back out with the amount covering the trade market losses. Also, you will be notified before a potential margin closes out.
- Avail a stop-loss order on every trade and open position to avoid high risk. You can set up a stop-loss order at a time when you open a position in the trade market and also at that time when you open a trade. You can also make changes in your stop-loss order when considering the current market prices and other conditions.
If the traders somehow come across the margin closeout situation, they can adopt certain strategies to stop margin closeout from happening.
- Gradually reduce the size of your open positions to reduce the margin requirements as you get close to the margin closeout.
- Close the open position that is losing more to reduce the level of margin used in the margin requirements.
- When you are close to a margin closeout at the last resort, you can increase the leverage on your trading account instead of using lower leverages.
- Relocate funds in the affected account from another sub-account to avoid margin closeout having happened.
- Add more funds to the account regularly to fulfil the margin requirements required to keep the positions open for trading.
Bottom line
Overall, the margin closeout will automatically close the open position of trading for the trader and cause losses in trading, as it happens when the margin level falls below the margin used to fulfil the requirements of the open positions. Therefore, to avoid the margin closeout from the trading platform, the trader should monitor the trading account’s level and add a sufficient amount of funds to the account before the trading platform alarms the trader and sends notifications to relocate the account’s margin level.