What are Knockouts?

What is a Knockout?

A Knockout is a derivative contract that is automatically closed – or ‘knocked out’ – if the underlying price reaches your chosen Knockout level, which is set by you at the time of opening a position. They’re usually traded over the counter (OTC), directly between you and your provider and can be used to speculate on commodities, currencies and indices markets.

Knockouts have an expiry, with the position settled upon that date if the position remains open up to that point.

A core feature of a Knockout is that they move one-for-one with the underlying market – meaning that for every point the asset’s price moves, the price of the Knockout moves the same amount. This is what makes them a popular speculative tool.

How does a Knockout work?

Knockouts share many similarities with standard CFD trades in that you can go long or short on a given asset at a set price. However, there are several differences. They come with a built-in guaranteed stop – known as the Knockout level - which you set at the time of opening your position and where your trade is closed (or ‘knockout out’) should that price level be reached.

Knockouts can only be bought to open, unlike traditional CFDs which can also be sold to open. However, you can still trade rising and falling markets with the different types of Knockouts available to you. You would buy an UP KO if you believe the market will rise, and buy a DOWN KO if you have a bearish view and think the market will fall.

Knockouts have an expiry date which means that the position will be settled at the time the date is reached, if it hasn’t already been knockout out. For FX and indices Knockouts, the expiry date will be 12 months from the date you open the position. For commodities Knockouts, the expiry date will follow the underlying futures market expiry for the instrument and will be indicated in the Knockout market name.

When you trade Knockouts with FOREX.com, you’ll never actually take ownership of, or sell, the underlying asset at the end of the position. Instead, your profit and loss will always be settled in cash. You’re speculating on whether the price will rise or fall – and your profit or loss is determined by how far the market moves in your favour. 

Learn more about CFD trading.  

Pros and cons of Knockouts

Knockouts are a simple, innovative, limited-risk way to trade forex, indices and commodities. The key benefits of trading Knockouts are:

1. They have higher leverage* and lower risk
By choosing your own Knockout level and trade size, you determine the margin requirement and maximum risk on the trade. A trade will automatically close, or get ‘knocked out’, if the FOREX.com underlying market price reaches your chosen level.

2. They move one-for-one with the underlying market
Knockouts have a unique feature whereby the price moves one-for-one with the underlying FOREX.com price. For every point the underlying market moves, the price of the Knockout moves by the same amount.

3. You can go long or short 
You’ll always buy to open a Knockout position, but you can go long on the underlying market by buying an UP KO, or short the underlying market by buying a DOWN KO. If the market moves in your chosen direction, you’ll make a profit; if it moves against you, you’ll make a loss.

4. You can close your trade up until expiry
You have the flexibility of closing your position at any time before expiry to lock in any profits, unless your Knockout level is triggered and the trade closes for a loss.

For FX and indices Knockouts, positions are assigned a dynamic expiry date 12 months from the date of opening. Any positions held until expiry will be closed at 4PM EST on the expiry date. If the expiry date falls on a trading holiday, the position will be closed on the previous trading day (not business day). For Commodity Knockouts, market expiries are based on the underlying futures market, and the expiry date will be stated in the Knockout market name.

Risks of Knockouts

While trading Knockouts does come with lower risks than other derivatives thanks to its built-in closure level, it’s not without risk completely. 

Knockouts do often experience volatility, particularly around major news events, which can cause large price swings. This makes it important to consider how far away from the market price you’ve set a Knockout level, as a single move could knock out your trade. 

When you trade Knockouts with FOREX.com, you’ll be using CFDs, which are leveraged derivatives. This means that you only have to put down a small initial deposit to get full market exposure. While leverage can magnify your profits, it can also magnify your losses, making it important to manage your trading risk.

See our suite of risk management tools. 

*when compared to the equivalent CFD market