Margin call and stop out

Margin level is the word for a ratio. The platform calculates it as equity divided by margin used, then multiplies by 100. Equity is cash plus or minus any running profit or loss. Margin used is the deposit locked behind open positions. The result is a percentage, and that percentage is the number the broker watches. A high figure means the account holds far more equity than the margin it has committed. A low figure means the two are close together.

On an Australian account the platform shows this percentage beside the equity and margin figures. It updates with every price tick. If equity is A$1,500 and margin used is A$300, the margin level is 1,500 divided by 300, times 100, which is 500 per cent. If a loss cuts equity to A$450 with the same A$300 margin used, the level is 150 per cent. The profit and loss figure changed, but the margin level is what the broker acts on.

Margin used does not stay still. Open a second position and the margin used rises. The same equity then produces a lower margin level. Add A$300 of margin used to the first example and margin used becomes A$600. Equity of A$1,500 now gives a margin level of 250 per cent, not 500 per cent. Nothing about the first position changed. The account simply committed more of its equity as margin, so the buffer between equity and margin used shrank.

A margin call level is the first threshold. It is a warning, not a closure. When the margin level falls to it, the broker tells the account holder that equity is getting close to margin used. A stop out level is the second threshold. When the margin level falls to it, the broker closes positions without asking. On a typical platform these are set at 100 per cent and 50 per cent, though the exact figures vary between brokers. Some use 100 and 50, some use different numbers, and some set them per instrument.

The distance between the two thresholds is measured in equity, not in pips. Take margin used of A$400. At a 100 per cent margin call, the warning appears when equity reaches A$400. At a 50 per cent stop out, closure begins when equity reaches A$200, which is half of A$400. The gap between warning and closure is A$200 of equity. That is the amount the account can lose after the warning before the platform starts closing positions.

Pip value turns that equity gap into a price distance. On 0.20 standard lots of AUD/USD at 0.6640, one pip is worth A$13.28. A$200 divided by A$13.28 per pip is about 15.1 pips. So a fall of roughly 15 pips in AUD/USD, with margin used unchanged, moves the account from the warning to the start of closure. On a smaller position the same A$200 stretches further, because each pip is worth less. On a larger position it stretches less. The thresholds are fixed percentages, but the price distance to reach them depends on position size.

When the margin level reaches the stop out, the platform does not close everything by default. It closes positions until the margin level rises back above the stop out. The usual order is the largest losing position first, then the next largest loser, and so on. Closing a losing position releases its margin and removes its loss from equity, so the margin level rises. The platform checks the level after each closure and stops when it is back above the threshold. Some brokers close all positions at once instead. The contract specifications for the account state which method applies.

The order matters because it decides which position survives. If two positions are open and one is losing more than the other, the larger loser is usually closed first. That may leave the smaller loser open. It may also leave a winning position untouched, because closing a winner would not release the same amount of margin or remove the same loss. The platform is not choosing the best outcome for the account holder. It is following a rule that restores the margin level with as few closures as possible.

Rounding, swap and commission can shift the exact point of closure. A broker may round the margin rate, charge swap on positions held overnight, or add commission on entry and exit. These amounts change equity and margin used, so the margin level at any moment is slightly different from a clean calculation. The thresholds themselves may also be set at figures other than 100 and 50 per cent. The only reliable source is the contract specifications on the platform being used, not a general example.