Understanding Margin Call and Stop Out Levels
Retail forex brokers have different margin policies. Some use just a Margin Call, while others have both a Margin Call Level and a Stop Out Level.
Previously, we explored a scenario with a broker that only issued a Margin Call. Now, let’s walk through a situation where your broker sets:
- Margin Call Level: 100%
- Stop Out Level: 50%
Let’s see what happens when a trade moves against you.
Step 1: Funding Your Trading Account
You deposit $10,000 into your trading account.
Account Summary:
| Balance | Equity | Used Margin | Free Margin | Margin Level |
|---|---|---|---|---|
| $10,000 | $10,000 | $0 | $10,000 | – |
Step 2: Open a Trade and Calculate Margin
You decide to go long GBP/USD at 1.30000, opening 1 standard lot (100,000 units). Your broker requires 5% margin.
- Notional Value: £100,000 × 1.3000 = $130,000
- Required Margin: $130,000 × 5% = $6,500
Since this is your only open trade:
- Used Margin = Required Margin = $6,500
Step 3: Initial Trade Conditions
The price hasn’t changed, so your Floating P/L = $0.
- Equity = Balance + Floating P/L = $10,000 + $0 = $10,000
- Free Margin = Equity – Used Margin = $10,000 – $6,500 = $3,500
- Margin Level = (Equity / Used Margin) × 100 = (10,000 / 6,500) × 100 = 154%
Updated Account Summary:
| FX Pair | Position Size | Entry | Price | Equity | Used Margin | Free Margin | Margin Level | Floating P/L |
|---|---|---|---|---|---|---|---|---|
| GBP/USD | 100,000 | 1.30000 | 1.30000 | $10,000 | $6,500 | $3,500 | 154% | $0 |
Price Drops 400 Pips
GBP/USD falls to 1.26000. Let’s see the impact:
1. Recalculate Margin
- New Notional Value = £100,000 × 1.26000 = $126,000
- Required Margin = $126,000 × 5% = $6,300
2. Floating Loss
- Loss = (1.26000 – 1.30000) × 100,000 = -400 pips
- Floating P/L = -400 × $10 = – $4,000
3. Equity and Margin Status
- Equity = $10,000 – $4,000 = $6,000
- Free Margin = $6,000 – $6,300 = –$300
- Margin Level = ($6,000 / $6,300) × 100 = 95%
You’ve hit the Margin Call Level! Your broker will issue a warning. Your position stays open, but you can’t open new trades unless your Margin Level climbs back above 100%.
Updated Account Summary:
| FX Pair | Entry | Price | Equity | Used Margin | Free Margin | Margin Level | Floating P/L |
|---|---|---|---|---|---|---|---|
| GBP/USD | 1.30000 | 1.26000 | $6,000 | $6,300 | -$300 | 95% | -$4,000 |
Price Drops Another 290 Pips
GBP/USD falls further to 1.23100.
1. New Margin Calculations
- Notional Value = £100,000 × 1.23100 = $123,100
- Required Margin = $123,100 × 5% = $6,155
2. Updated Floating Loss
- Total pip loss = 690 pips
- Floating P/L = -690 × $10 = – $6,900
3. Account Status
- Equity = $10,000 – $6,900 = $3,100
- Free Margin = $3,100 – $6,155 = –$3,055
- Margin Level = ($3,100 / $6,155) × 100 = 50%
You’ve now hit the Stop Out Level!
Stop Out Triggered
Because your Margin Level = 50%, the broker will automatically close your position at market price.
- Your Floating Loss becomes Realized.
- Your Used Margin is released.
- Balance is updated to $3,100.
With no trades open:
| Balance | Equity | Free Margin | Used Margin | Margin Level |
|---|---|---|---|---|
| $3,100 | $3,100 | $3,100 | $0 | – |
You’ve lost 69% of your account.
Loss % = ((3,100 – 10,000) / 10,000) × 100 = -69%
Takeaway
Hitting a Stop Out means the market closed your position to prevent further loss. It’s a harsh reminder of the risks of trading with high leverage.
In the next lesson, we’ll explore what happens if you try to trade forex with just $100 in your account. Spoiler: it’s risky business.