Margin calls & stop-outs

Margin is the deposit your broker holds while a leveraged position is open. Two numbers govern your account: equity, which is your balance plus or minus open profit and loss, and used margin, which is what your open positions require. Their ratio is the margin level, usually shown as a percentage, and it is the number that decides whether your positions stay open.

As losses accumulate, equity falls while used margin stays roughly constant, so the margin level drops. When it crosses the broker's margin-call threshold — commonly 100% — you are warned and cannot open new positions. If it keeps falling to the stop-out level, often 50%, the broker begins closing your positions automatically, usually the largest loser first, until the ratio is restored.

The cruel part is the timing. Margin levels fall fastest during violent moves, exactly when spreads are widest and liquidity thinnest, so forced closures tend to happen at the worst available prices. A stop-out is not an orderly exit at a level you chose; it is a liquidation executed on the broker's schedule, not yours.

A stop-out is not an exit you chose. It is a liquidation executed on the broker's schedule, at the worst prices of the day.

Retail negative-balance protection, mandatory in the UK and EU and offered voluntarily by many other regulated brokers, means you should not end up owing money beyond your deposit. It is worth confirming that your broker offers it, because it is the difference between a bad day and a debt.

Avoiding all of this is unglamorous and entirely arithmetic: use less leverage than you are offered, keep total open heat modest, always have protective stops, and keep free margin comfortable rather than fully deployed. If your positions are only viable when nothing goes wrong, they are not sized correctly.