Margin call and stop out: how they work

When you open a leveraged position, part of your account is set aside as margin. It is not a fee but a deposit held while the position is open. Four numbers in your platform show how much room your account has:

• Balance: deposits minus withdrawals, plus or minus the result of closed trades.
• Equity: your balance plus or minus the floating profit or loss of open positions.
• Used margin: the margin your open positions currently hold.
• Free margin: equity minus used margin, available for new positions or further losses.

Margin call and stop out are both measured with the margin level: margin level = equity ÷ used margin × 100. As floating losses grow, equity falls and so does the margin level.

A margin call is a notification that your equity has fallen to the margin call level. At NextTrade, a margin call occurs when your equity falls to or below 100% of the margin your open positions require, which is a margin level of 100%. The level is the same on every account type.

A margin call is an alert only. It does not close any position, and it does not oblige NextTrade to prevent further losses. While your margin level stays below the margin call level, you may not be able to open new positions.

At this point there is no free margin left, and any further loss moves the account towards the stop-out level. Some traders close or reduce positions, some add funds and others wait; none of these removes the risk, and the decision is yours.

A stop out is the automatic closure of open positions. At NextTrade, when your equity falls to or below 50% of the required margin (a margin level of 50%), positions start to close automatically, beginning with the position that has the largest loss, until the margin level is back above the stop-out level.

Closing a position turns its floating loss into a realised loss. Positions close at the next available price, which in a fast market or after a gap can be worse than the price at which the level was reached, so a stop out may not prevent your account from going below zero in extreme market conditions.

The margin call and stop-out levels are set out in the Terms and Conditions, which also say that NextTrade may change leverage, margin requirements and stop-out levels, for example in response to market volatility.

The two levels can be close in price. Take a made-up account with a balance of $500 and one open position of 0.5 lots of EUR/USD that uses $250 of margin. On 0.5 lots, one pip is worth about $5.

In this example only 25 more pips separate the margin call from the stop out. A 75-pip move costs about $375, most of the account.

What changes how quickly an account reaches these levels:

• Position size: the larger the position, the more each pip is worth.
• Several open positions: margin level covers the whole account, so losses on one position reduce the room for the others.
• Dynamic leverage: it does not change the levels, but larger positions can receive lower leverage, which uses more margin.
• Costs: spread, commission and swap charges reduce equity like a price move.
• Volatility and gaps: prices can jump several pips at once, for example around major economic releases or after the weekend.

NextTrade offers negative balance protection on all retail accounts, meaning clients cannot lose more than the funds available in their trading account. If a gap or slippage closes a position below zero, the balance is reset to zero.

This does not limit the loss to the margin of a position. Neither a margin call nor a stop out guarantees that you will not lose your deposited funds, and you can lose all of them.

Trading platforms show balance, equity, margin, free margin and margin level, updated with every price change. In MT5 they appear in the Toolbox window, under the open positions.

Before opening a trade, some traders check how much margin it will use and what a move to their stop loss would do to equity. Sizing a trade from the amount you are prepared to lose is covered in the position sizing guide. A stop loss can limit a loss in normal conditions, but it can be filled at a worse price in a gap or a fast market.