Margin, margin call and stop out: what happens when your position loses

In the previous lesson, you saw that leverage lets you open a big position while locking up only a small margin. The next question is simple: what happens when that position loses money? Your broker will not let you lose forever. It monitors your account continuously, and past a certain threshold, it steps in for you.

To understand this mechanism, you need five terms you will see on every platform, MetaTrader, cTrader or TradeLocker: balance, equity, used margin, free margin and margin level.

The five numbers on your account

• Balance: the money in your account, ignoring open positions. It only changes when a trade closes, when swap is applied or when you deposit.
• Equity: your balance plus or minus the floating profit or loss of your open positions. It is what your account would be worth if you closed everything right now.
• Used margin: the amount held as collateral for your open positions, calculated as notional value divided by leverage.
• Free margin: equity minus used margin. It is what you have left to open new positions or absorb losses.
• Margin level: the ratio between equity and used margin, expressed as a percentage.

As long as you have no open positions, margin level does not exist. As soon as you open a trade, it appears, and it is the number your broker watches. The lower it goes, the closer you get to a forced intervention.

Margin call and stop out: two different thresholds

A margin call is a warning. When your margin level drops below a threshold set by the broker, often 100%, you get an alert and can no longer open new positions. Your trades stay open. It is a signal: either reduce your exposure, add funds, or accept the risk of going further.

The stop out is the next step, and it is not negotiable. When the margin level falls to the stop-out threshold, the broker automatically closes your positions, usually starting with the biggest loser, until the level recovers. For retail clients of a broker regulated by the FCA in the UK, in the EU, or by ASIC in Australia, this threshold is set at 50% at most by regulation. Offshore, some brokers go down to 20% or even lower.

Step-by-step example on EUR/USD

You have a 5,000-euro account with a broker applying 1:30 leverage. You buy 1 lot of EUR/USD at 1.1000. To keep the maths readable, we assume the pip value stays at 10 dollars, about 9.09 euros.

Price drops 100 pips to 1.0900. The floating loss is 100 × 9.09 euros, about 909.09 euros. The balance does not move, but equity falls.

Now let's find where the two thresholds sit. The margin call at 100% comes when equity equals used margin. The stop out at 50% comes when equity is worth only half of used margin.

Look at the result: the stop out does not protect you from a big loss. It kicks in when you have already lost two thirds of your capital. It mainly protects the broker, and it stops your account from going below zero.

Position size changes everything

Take the same 5,000-euro account, but with just 0.3 lot. Used margin drops to 1,000 euros and the starting margin level jumps to 500%. The 50% stop out only arrives when equity falls to 500 euros, a loss of 4,500 euros.

With 0.3 lot, it would take a move of roughly 1,650 pips against you to be liquidated, versus 367 with one lot. Of course, you should never let a loss run that far: your stop loss must close the trade long before. But it shows that the stop out should never be part of your plan.

How never to get liquidated

1. Put a stop loss on every position, as soon as you open it.
2. Size your position by the loss you accept at the stop, not by available margin.
3. Watch your overall margin level, especially if you hold several positions in the same direction on correlated pairs.
4. Be careful around weekends and major announcements: a price gap can blow through several thresholds at once.
5. Do not add funds to "rescue" a losing position: you only increase the possible loss.

Use the calculator to check the margin your next position will lock up. If it is a big share of your capital, cut the size before you hit the button.

Leveraged trading loses money for the majority of retail traders. Understanding these thresholds does not make trading risk-free, but it spares you the worst kind of exit: the one you did not choose. In the next lesson, you will see the regulatory rules that frame all of this.