Margin and Stop-Out

Margin = a locked-up deposit

Opening a position locks up "position value ÷ leverage" as margin. equity = balance + floating P&L; equity minus used margin is your free margin, which rises and falls with floating P&L.

Margin level: your account's thermometer

margin level = equity ÷ used margin × 100%. Floating losses shrink equity and the level keeps sliding; the lower it gets, the closer you are to being stopped out.

Warning first, then stop-out

When the level falls to the higher warning line (say 100%), the broker sends a margin call, which is only a warning. If it keeps falling to the lower stop-out line (say 50%), the system triggers an automatic stop-out. The exact levels vary by broker.

Key takeaways

• Required margin = position value ÷ leverage; equity = balance + unrealized P&L; free margin = equity − used margin.
• Margin level = equity ÷ used margin × 100%. The bigger your unrealized loss, the lower it goes.
• When the margin level first falls to a higher warning line (e.g. 100%), you get a margin call. If it keeps falling to a lower stop-out line (e.g. 50%), the system closes your positions automatically. The exact levels vary by platform.
• Leverage only decides how much margin is used, not your P&L per pip. Lot size is what sets your risk.

Try it yourself

You can do these exercises in this lesson's interactive simulation:

1. Keep the defaults and play the "Drop scenario": the margin level first falls below 100% (margin call), then to 50% (STOP OUT). When does each happen?
2. Drop the lot size to 0.05 and play again: with the same market, do you still get stopped out?
3. Switch leverage between 1:50 and 1:500 only: does the P&L per pip change? What happens to used margin and the stop-out line?
4. Set leverage to 1:10 and lots to 1.0: why "Not enough margin to open"? How much margin does this position need?

Quiz and explanations

1. You raise leverage from 1:100 to 1:500 with the same lot size. What happens?

Answer: Used margin goes down and free margin goes up.Higher leverage reduces the margin used, but your P&L per pip depends only on lot size.

2. Equity is $500 and used margin is $1,000. What's the margin level?

Answer: 50%.$500 ÷ $1,000 = 50%, exactly this lesson's stop-out line.

3. Your balance is $2,000, used margin is $500 and you have an unrealized loss of $1,200. What's the margin level?

Answer: 160%.Equity = $2,000 − $1,200 = $800; $800 ÷ $500 = 160%, still above the 100% warning line.

Terms in this lesson

• equity (Equity): Account balance + current floating profit or loss.
• free margin (Free Margin): Equity minus used margin: what's left to absorb losses or open new positions.
• leverage (Leverage): Controlling a large position with a small amount of margin; 1:100 means $1 controls a $100 position.
• lot (Lot): The unit of trade size in forex: 1 standard lot = 100,000 units of the base currency; 0.1 is a mini lot and 0.01 a micro lot.
• margin (Margin): The deposit set aside when you open a position = position value ÷ leverage.
• margin call (Margin Call): When your account drops below maintenance margin, you must add funds or your positions will be closed.
• margin level (Margin Level): Equity ÷ used margin × 100%; the lower it is, the more danger you're in.
• notional value (Notional): The total value of the asset a position controls; for example, 1 lot of EUR/USD ≈ $108,500.
• stop-out (Stop Out): When your margin level falls to the broker's limit (for example 50%), the system closes your positions automatically.