Leverage lets a trader control a position whose market value is larger than the cash committed as margin. It also makes account equity more sensitive to price changes. If open losses reduce equity far enough, the account may reach a margin-call threshold and later a stop-out threshold.
These mechanisms protect the trading provider from an account carrying positions it can no longer support. They do not guarantee that a trader's losses will be limited to a chosen amount. Fast markets, gaps and slippage can produce a worse result than expected, and losses may exceed the deposit where negative balance protection does not apply.
The Core Margin Mechanics
Balance is the account value after closed trades and other completed transactions. Equity is the balance adjusted for unrealised profit or loss on open positions.
Used margin is the amount reserved to support open positions. A simplified calculation is:
Required margin = position value divided by leverage ratio.
If a hypothetical position has a value of $10,000 and the account uses 20:1 leverage, the required margin is $10,000 divided by 20, or $500.
Free margin is equity minus used margin. It represents the remaining capacity available to absorb losses or support other positions. Margin level compares equity with used margin:
Margin level = equity divided by used margin, multiplied by 100.
A margin level of 200 percent means equity is twice the used margin. As open losses reduce equity, free margin and margin level fall. Opening more positions raises used margin and can also push the margin level lower.
What a Margin Call Means
A margin call occurs when the margin level reaches a threshold specified in the account terms. Despite the name, it may not involve a telephone call. It can appear as an account warning, a notification or a restriction on opening new positions.
A margin call is not necessarily an immediate forced closure. It signals that the account has little remaining capacity relative to its open exposure. The trader may need to close positions, reduce position sizes or add funds. Adding funds can increase equity, but it also places more capital at risk and does not correct an oversized or poorly controlled position.
Thresholds and responses vary. A trader should check how the account calculates margin, which instruments have different margin requirements and whether requirements can change under specified market conditions.
How a Stop Out Works
A stop out is the automatic closing of one or more open positions after the margin level reaches a lower predefined threshold. The purpose is to release used margin and reduce the account's exposure.
The closure order depends on the account rules. The system might close the position with the largest loss, the largest margin requirement or another position selected by a stated procedure. Positions can be closed one at a time until the margin level rises above the stop-out threshold.
A stop out is different from a stop loss. A stop loss is an order attached to a specific trade and triggered by market price. A stop out is an account-level process triggered by the relationship between equity and used margin. A position may therefore be closed by stop out before its own stop loss is reached.
Worked Hypothetical Example
Imagine a $1,000 account with one hypothetical position requiring $500 of margin. Assume, only for this example, that the margin-call threshold is 100 percent and the stop-out threshold is 50 percent.
- At the start, equity is $1,000. Margin level is $1,000 divided by $500, multiplied by 100, which equals 200 percent. Free margin is $500.
- The open position develops a $500 unrealised loss. Equity falls to $500. Margin level becomes $500 divided by $500, multiplied by 100, which equals 100 percent. The account reaches the assumed margin-call threshold.
- The loss increases to $750. Equity becomes $250. Margin level is $250 divided by $500, multiplied by 100, which equals 50 percent. The assumed stop-out threshold is reached, so automatic closure can begin.
The example excludes commissions, financing charges, spread changes and slippage. In practice, these costs can reduce equity further. An execution gap may also cause closure below the threshold because the next available price can differ from the triggering price.
Common Mistakes That Increase Stop-Out Risk
- Using most available margin: A high margin level can fall quickly when several positions move against the account.
- Confusing balance with equity: A stable balance can hide large unrealised losses.
- Adding correlated positions: Several trades may represent the same underlying currency or market exposure.
- Relying on the margin call as a risk tool: The warning may arrive after losses are already substantial.
- Ignoring trading costs: Spreads, commissions and overnight financing reduce equity.
- Assuming stop losses always execute at the requested price: Gaps and thin liquidity can cause slippage.
- Adding funds without reducing exposure: This delays the threshold but places additional capital at risk.
Practical Prevention Checklist
- Read the account terms and record the margin-call and stop-out percentages.
- Calculate required margin before every order, including the effect of existing positions.
- Set a personal minimum margin level well above the provider's thresholds.
- Size each position according to a predefined loss limit, not the maximum margin available.
- Check combined exposure across correlated instruments.
- Allow extra room for spreads, financing charges, gaps and slippage.
- Use stop losses where appropriate, while recognising that execution prices are not certain.
- Reduce exposure early if equity or free margin approaches the limits in the trading plan.
Before placing a leveraged trade, write down the position value, required margin, planned exit and maximum acceptable account loss. If those figures leave little room for normal price movement, reduce the position or do not take the trade.
Educational content only, not investment advice. Leveraged trading can lose more than you expect.