Margin call and stop out

Two accounts hold the same position: one standard lot of EUR/USD at 1.0850. Account A has a balance of KSh 108,500 and no other open trades. Account B has a balance of KSh 217,000 and holds two standard lots. Both see price move 30 pips against them. The loss on one lot is 30 pips times 10 units per pip, which equals 300 units of the quote currency. In shillings that figure varies with the conversion rate at the time, so the exact amount differs between brokers.

Account A decided before opening the trade to close if the loss reached 20 pips. At 20 pips the loss is 200 units of the quote currency. The account closes the position and keeps the rest of the balance. Account B did not set a loss limit. The price keeps moving. Free margin falls because the floating loss grows. The margin level, which is equity divided by margin times 100, falls with it.

The difference is not luck. Account A removed the decision from the moment of loss. Account B left the decision to the broker. A broker watches the margin level, not the intention of the account holder. When the level reaches the broker's warning point, the broker may send a margin call. When it reaches the stop out point, the broker may close positions without asking. The planned exit keeps control. The forced exit does not.

Margin level is equity divided by used margin, multiplied by 100. Equity is balance plus or minus floating profit or loss. Used margin is the amount set aside by the broker for open positions. If equity is KSh 108,500 and used margin is KSh 217,000, the margin level is 108,500 divided by 217,000, times 100, which equals 50 per cent. That is the stop out level used in this lesson. At 50 per cent the broker may close positions.

The margin call level is usually higher than the stop out level. A common warning point is 100 per cent. At 100 per cent, equity equals used margin. If equity is KSh 80,000 and the margin level is 100 per cent, the used margin is 80,000 divided by 1.00, which equals KSh 80,000. The broker may warn the account holder at this point. The warning is not a close. It is a signal that free margin has gone.

Free margin is equity minus used margin. At a margin level of 100 per cent, free margin is zero. No new position can be opened because there is no free margin to cover it. If price moves further against the open position, equity falls below used margin, the margin level drops below 100 per cent, and the account moves towards the stop out level. Each broker sets its own margin call and stop out percentages. The 100 per cent and 50 per cent levels are common but not fixed. Check the contract specifications of the broker before trading.

When the margin call appears, the account holder has choices. One choice is to close part of the position. Closing half of two standard lots leaves one standard lot. Used margin falls by half, so the margin level rises even if equity stays the same. Another choice is to add funds. Adding funds raises equity, which raises the margin level. But adding funds without reducing the position leaves the same used margin in place. If price moves against the position again, the margin level falls again from the new, higher starting point.

The order in which positions close matters. If several positions are open, the broker may close the largest losing position first, or the most recently opened, or follow another rule. The rule varies between brokers. Closing the largest loser first removes the biggest drag on equity, which can lift the margin level for the remaining positions. Closing a smaller winner first frees less margin and may not stop the fall. The account holder who has read the broker's close-out rules knows what to expect.

A stop out is not a penalty. It is the broker protecting itself against a negative balance. In a fast market, the broker may close positions at the next available price, which can be worse than the stop out level. Slippage means the final loss can be larger than the level suggests. For that reason, the stop out level is a last resort, not a plan. The plan is to set a loss limit per trade, keep free margin above zero, and reduce the position when the warning appears.