Most traders don’t think about margin until their broker closes their trades for them. By then it’s too late. A stop-out isn’t the market being unfair. It’s a mechanical rule that kicks in when an account runs out of room, and it’s completely predictable if you understand how margin works.
Here’s what margin actually is, how margin calls and stop-outs happen, and how to make sure your broker never has to step in.
What margin is
When you trade forex with leverage, you don’t pay the full value of the position. You put up a deposit, called margin, and the broker lets you control a much larger amount.
Say you buy half a standard lot of EUR/USD, worth about $55,000. With leverage of 50:1, the broker sets aside 1/50th of that, about $1,100, from your account as margin. That money isn’t spent. It’s held as security while the trade is open.
A few terms you’ll see on your platform:
- Balance: your account value from closed trades
- Equity: your balance plus or minus the profit or loss on open trades
- Used margin: the money set aside to hold your open positions
- Free margin: equity minus used margin, what’s left to absorb losses or open new trades
- Margin level: equity divided by used margin, as a percentage
Margin level is the number that matters. When it falls, your broker gets nervous.
Margin call vs stop-out
Brokers set two thresholds on margin level. The exact numbers vary, so check your broker’s, but a common setup is:
| Margin level | What happens |
|---|---|
| Above 100% | Normal trading |
| At 100% (margin call) | Warning: you usually can’t open new trades |
| At 50% (stop-out) | The broker starts closing your positions automatically, usually the biggest loser first |
A margin call is a warning. A stop-out is the broker acting, at whatever price is available, which in a fast market may be worse than you’d expect.
A worked example
Here’s how an account gets stopped out, step by step. Take a $2,000 account that buys half a standard lot of EUR/USD with no stop loss. Each pip is worth about $5.
| Price move against you | Loss | Equity | Margin level |
|---|---|---|---|
| 0 pips | $0 | $2,000 | 182% |
| 100 pips | $500 | $1,500 | 136% |
| 180 pips | $900 | $1,100 | 100%: margin call |
| 290 pips | $1,450 | $550 | 50%: stop-out |
A 290-pip move takes away almost three-quarters of the account. That’s not an extreme move for EUR/USD over a few days, and for gold, an equivalent hit can happen in hours. (Our guide to trading gold explains why it needs much smaller size.)
Notice what actually caused the stop-out. Not leverage on its own. It was a position too large for the account, held without a stop loss.
How traders end up here
The stories are usually some version of the same few mistakes:
- Opening too many trades at once. Each one uses margin. Five modest positions can add up to one huge one.
- No stop loss. The trade keeps running against you until the broker’s rule closes it instead of yours.
- Adding to a loser. Every new position uses more margin while equity is falling, which drives margin level down twice as fast.
- Holding through big news. Spreads widen and prices gap, and margin level can drop below the stop-out level before a stop loss fills.
- Using offshore leverage of 500:1 or more. High leverage makes it easy to open positions far too big for the account.
Leverage in Canada
If you trade with a CIRO-regulated broker in Canada, margin requirements are set under CIRO’s rules, and they’re generally much stricter than what offshore brokers offer. That means more margin per trade, and less available leverage. Many traders see that as a disadvantage. It’s really a guardrail. Our article on CIRO-regulated vs offshore brokers explains the trade-offs.
What leverage is sensible for a beginner?
The leverage your broker offers and the leverage you actually use are different things. What matters is your effective leverage: the total size of your open positions divided by your account equity.
A $2,000 account holding a $55,000 position is running at about 27:1 effective leverage, even if the broker allows 500:1. For someone starting out, keeping effective leverage low, in the single digits, makes margin calls very unlikely and keeps any single mistake survivable.
The simplest way to get there is to size every trade from your stop loss and a fixed risk per trade. If you risk 1% with a sensible stop, your effective leverage almost takes care of itself. Our guides to how much to risk per trade and position sizing in Canadian dollars show the method.
How to never get stopped out
- Always use a stop loss, placed where your trade idea is wrong, not where the broker would close you.
- Size from your stop, so a loss is a planned percentage of the account, not a margin event.
- Watch your total exposure, not just each trade. Several trades in the same direction can act like one big one.
- Keep free margin high. If your margin level regularly drops near 200%, you’re too big.
- Be careful around news and weekends, when gaps can skip past your stop.
- Know your broker’s numbers: the margin call and stop-out levels, and how they close positions.
If your stop loss is doing its job, your broker’s stop-out never has to. That’s the goal. Our article on risk-reward vs win rate covers the rest of the risk picture, including why doubling up after a loss is so dangerous.
The bottom line
Margin is the deposit your broker holds while your trades are open. Margin level, equity divided by used margin, is what triggers a margin call and, below that, a stop-out where the broker closes your positions for you. Stop-outs come from positions too big for the account, held without stops. Keep effective leverage low, size every trade from a stop loss, and the broker’s rule should never come into play.
Disclosure: The author, Mike Harding, founded Academy of Financial Markets in Toronto and teaches its mentorship program. Figures are illustrative; margin call and stop-out levels vary by broker. This article is educational and is not financial advice. Trading on margin carries a high level of risk and may not be suitable for all investors.