Margin, margin call and stop-out
Lesson 5 of 31 in the course “Forex”. Free, with animations and a quiz.
Margin: a deposit for the trade
Margin is the part of your money the broker freezes as a deposit while a trade is open. Example from the picture: $1,000 in the account, a 0.10-lot EUR/USD trade, which is 10,000 euros. At a rate of 1.085 that is 10,000 × 1.085 = $10,850. 1:30 leverage means the deposit is 30 times smaller than the trade: 10,850 / 30 ≈ $362. The rest, 1,000 − 362 = $638, is free margin.
Margin level
Margin level = equity / margin × 100%. Equity is your balance plus the floating result, meaning the profit or loss of trades that are still open. Example: equity $1,000, margin $362: 1,000 / 362 × 100% ≈ 276%. The trade goes $300 into the red: equity is $700, level 700 / 362 × 100% ≈ 193%. In short: the bigger the loss, the lower the margin level.
Margin call and stop-out
A margin call is the broker's warning that your deposit is running short. A stop-out is when the broker force-closes your trades itself, usually starting with the biggest loser, so the balance does not go negative. Often the margin call is at a 100% margin level and the stop-out at 50%. But every broker sets its own numbers: check your account terms. In crypto a similar forced close is called liquidation.
Example: when the stop-out hits
Same example: equity $1,000, margin $362, 0.10 lots of EUR/USD, which is $1 per pip. Margin call at 100%: equity has dropped to $362, a loss of 1,000 − 362 = $638, or 638 pips. Stop-out at 50%: equity $181, a loss of $819. With a small lot the stop-out is far away. A full lot would need a $3,620 deposit, more than the whole account: that trade would not even open.
Leverage changes the deposit, not the risk
With 1:500 leverage the deposit for the same 0.10 lots is 10,850 / 500 ≈ $22 instead of $362. But a pip is still worth $1, and a 20-pip stop is still $20. Lot and stop set the risk. The trap: big leverage lets you open a bigger lot. Rule of thumb: risk about 1% of the account per trade and use a stop-loss, the order that closes the trade at a loss automatically.
Check yourself
- Leverage went from 1:30 to 1:500, same lot and stop. What changed?
Correct answer: Smaller deposit, same risk to the stop. Leverage only changes the deposit: 10,850 / 500 ≈ $22 instead of $362. What you lose at the stop is set by the lot and the stop distance. - Margin level fell to 50% and the broker closed the trade itself. This is...
Correct answer: A stop-out. A stop-out is a forced close based on margin level. A margin call only warns you, and a stop-loss is set by you at a chosen price. - How do you avoid a stop-out?
Correct answer: Use a stop-loss and a small lot. A stop-loss closes the trade at a small loss long before a stop-out. Topping up or opening more trades only delays the problem and often makes the loss bigger.