The stop loss is automatically activated when the stop loss level set by the Forex company is reached or lowered. What is mainly applied to the loss cut level is the "margin maintenance rate". Some Forex companies call it "effective ratio" or "margin usage rate".
The margin maintenance rate is the ratio of the deposit margin to the required margin, and is calculated as follows.
【Calculation formula of margin maintenance rate】
Margin maintenance rate (%) = deposit margin ÷required margin× 100
The margin maintenance rate is 125 percent if you deposit 50,000 yen of margin in an account and hold a position utilizing 40,000 yen of it as necessary margin.
The loss cut is initiated when the margin maintenance rate approaches or falls below the level called the loss cut level specified by the Forex business owing to exchange rate volatility.
When the conditions for triggering the loss cut are reached in most cases, all open positions are closed, although certain Forex accounts just close part of them until the margin maintenance rate surpasses the loss cut threshold depending on particular criteria.
The implementation of the loss cut system is required by law, but the size of the loss cut is determined by each Forex firm. It is usually between 50 and 100 percent in large Forex organizations. There are many Forex businesses that set the loss cut level consistently, but there are also Forex accounts that allow the user to pick from a variety of loss cut levels.
