Margin call meaning: what is a margin call?

What a margin call means

When you trade with leverage, the broker sets aside part of your money as margin for each open position. While your trades are in profit or only slightly down, that is invisible. As losses grow, the money left in the account shrinks towards the amount the broker is holding as margin. When it gets close, the broker warns you: that warning is the margin call.

In stock markets, a margin call has a slightly different flavour: an investor who bought shares with a loan from the broker is asked to deposit more cash or sell shares to bring the loan back within limits. In forex and CFD trading it is mostly automatic, and the practical choices are the same: add money, close positions, or let the platform close them for you.

The four numbers on your platform

Every trading platform shows the same four figures, and the margin call is defined by them.

• Balance: the money in the account, counting closed trades only.
• Equity: the balance plus or minus the profit or loss on open trades. This is what the account is worth right now.
• Used margin: the deposit the broker is holding against your open positions.
• Free margin: equity minus used margin, the money available to open new trades or absorb losses.

From these comes the one that matters: margin level = equity / used margin x 100. A margin level of 300% means your equity is three times the margin in use. At 100% the equity equals the used margin and free margin is zero. Many brokers issue the margin call at 100% (some at 80% or 120%) and stop out at 50%. Retail accounts in the EU and UK must be closed out at 50%; offshore brokers sometimes let it fall to 20% or lower.

A margin call and stop-out, worked through

Take a $2,000 account with 1:100 leverage. You buy one standard lot of EUR/USD at 1.1000, a position worth $110,000, with no stop-loss. Margin call at 100%, stop-out at 50%.

A 145-pip move, which EUR/USD can make in a few days, took 72.5% of the account. Nothing about the trade was unusual except its size: one lot was far too large for $2,000. With several positions open, the stop-out normally closes the one with the biggest loss first, then rechecks, which can leave you holding the trades you would rather have closed.

Now the same trade at 0.10 lots with a 30-pip stop-loss: the margin is $110, the margin level starts above 1,800%, and the worst case is a $30 loss, 1.5% of the account. The margin call never comes close. The margin calculator shows the margin for any size, and the position size calculator sets the size from your stop.

How to avoid a margin call

• Size every trade from its stop-loss. If one trade can only lose 1% to 2% of the account, it cannot drag the margin level anywhere near 100%.
• Count correlated trades together. Long EUR/USD, GBP/USD and gold at once is close to one big bet against the dollar, and the losses arrive together.
• Remember gaps. A stop-out fills at the next available price. Over a weekend or a major release, that can be far below the 50% line.
• Do not add money to save a losing trade by reflex. A deposit stops the stop-out, but if the trade idea is wrong, it only makes the eventual loss larger.