Web Trader MT5
A margin call is one of those trading terms that seems more dramatic than it needs to be, but understanding what margin and a margin call are before it happens to you is more useful than finding out about it after the fact.
Simply put, it’s a warning from your broker that your account may no longer have sufficient margin to support your open positions and action may be required. Depending on the broker’s terms, positions may be automatically closed if the relevant threshold is reached.
This guide will explain what a margin call is, how the mechanics work, what makes it different from a stop-out, and the practical ways to manage the associated risks.
You can also read our article on how leverage leads to margin calls in the first place.
What Is a Margin Call?
A margin call is a communication from your broker that the equity in your account has fallen below the amount needed to support your open positions. At this point, you may need to either add additional funds or reduce your exposure by closing some of your trades.
When you make a leveraged trade, margin is required to support the position. Margin is collateral retained while the position is open. As the trade swings against you, your account equity (your balance plus or minus unrealised profit or loss) drops. You will be alerted when your account reaches the broker’s margin call level.
A margin call may serve as a warning, depending on the broker’s terms. You may be able to respond by adding funds or closing or reducing positions. A stop-out may occur if equity subsequently reaches the applicable stop-out threshold.
How Does a Margin Call Work?
Your margin level is your equity divided by the used margin (represented as a percentage). You receive a margin call when your margin level falls to the level set by your broker.
The formula is straightforward:
Margin Level % = (Equity ÷ Used Margin) × 100
This is how the sequence works in practice:
- You enter a leveraged trade on margin – part of your account is locked as collateral
- The trade goes against you – your unrealised loss diminishes your account equity
- As equity declines, the margin level % falls with it
- The broker may notify you when the margin level reaches the applicable margin-call level, which varies by broker and account type.
- If equity reaches the applicable stop-out level, the broker may automatically close one or more positions in accordance with its terms.
Please note: margin call level and stop-out level will vary by broker and account type. The given percentages are only examples and not universal norms. Verify your broker’s exact levels before trading. Read this guide that explains the relationship between CFD leverage and how fast margin levels can move.
A Simple Margin Call Example
Working through an example with some actual numbers makes it clearer how a leveraged position can lead to a margin call, and how the margin level calculation works.
These figures are for illustration purposes only. The actual margin call and stop-out levels depend on the broker and the account type.
- You put $1,000 into your trading account
- You open a EUR/USD position using $500 margin (margin used = $500)
- Starting equity = $1,000; Starting margin level = ($1,000 / $500) x 100 = 200%
The trade is against you:
- Trade loses $300 → equity = $700 → margin level = ($700 ÷ $500) × 100 = 140% — no action yet
- Trade loses $500 → equity = $500 → margin level = ($500 ÷ $500) × 100 = 100% — margin call is issued
- Trade losses $750 → equity = $250 → margin level = ($250 ÷ $500) × 100 = 50% — stop-out triggered, position closes automatically
In this illustrative example, an adverse move of $750 on a $500 margin position reduced the original $1,000 account equity by three-quarters. If the leverage is higher – i.e., the same position would require only $100 of margin – the same price move would result in a lower margin level.
For context on how gold margin requirements specifically interact with this dynamic, that guide covers XAUUSD margin calculations in detail.
Margin Call vs Stop-Out — What Is the Difference?
A margin call is generally a warning that requires action from you. A stop-out may occur automatically when equity reaches a lower threshold, depending on the broker’s terms.
| Margin Call | Stop-Out | |
|---|---|---|
| What triggers it | Equity falls to margin call level (e.g., 100%) | Equity reaches the applicable stop-out level (e.g., 50%) |
| What happens | Broker sends a notification | Broker automatically closes one or more positions |
| Trader control | Yes — you may be able to respond by adding funds or closing positions | No — positions may be closed automatically |
| Purpose | Warning or notification | Automatic risk-management process under the broker’s terms |
Where the broker provides a separate margin-call threshold, the difference between that threshold and the stop-out level may provide an opportunity to respond. In fast-moving markets – a sharp news release, a geopolitical incident, a sudden currency shift – that window can close very quickly. A common mistake in leveraged trading is to rely on the margin call as a safety net, rather than actively monitoring position size.
A stop-out doesn’t mean all your positions are closed. Usually, the broker closes the biggest losing position, verifies whether the equity is still below the stop-out threshold, and closes more positions if necessary. The positions closed and the execution price depend on the broker’s applicable procedures and market conditions. If markets are turbulent, you could end up with a price far worse than you would have liked.
How to Avoid a Margin Call
Margin calls can result from insufficient margin relative to open-position exposure. Understanding leverage, monitoring open positions and managing risk can help you manage the associated risks.
Use a Stop-Loss on Every Trade
The most direct margin call prevention tool is a stop-loss set before the trade is opened. A stop-loss specifies an intended exit level, but it does not guarantee execution at that level or prevent losses from exceeding the intended amount, particularly in fast-moving or gapping markets. Consider the risks of trading without a stop-loss and whether this type of order is appropriate for your trading approach.
Don’t Use Maximum Available Leverage
The leverage ratio your broker offers and the leverage ratio you choose are different considerations. Trading at the maximum available leverage minimises your margin requirement — which means the smallest adverse move produces the largest proportional impact on your margin level. Using a lower leverage ratio generally results in a higher margin requirement for a given position size.
Apply the 1-2% Rule to Position Sizing
Consider limiting the amount you risk on any single trade to a small percentage of your total account balance, such as 1–2%. For example, if your account is $5,000, risking 1–2% would correspond to 50−100 on one trade. This means sizing positions based on acceptable loss and stop-loss distance — not based on how much margin is available. Using a defined risk limit per trade may help reduce the impact of a losing streak, but it cannot prevent a margin call.
Monitor Free Margin Regularly
Free margin is the portion of your account equity not currently committed as margin on open position. It represents the amount available to support additional positions or absorb adverse price movements before margin levels become critical. Monitoring free margin on open positions, particularly before adding new trades, can help you assess the available buffer against adverse price movements and avoid taking on excessive simultaneous positions.
Don’t Add to Losing Positions
Adding more lots to a losing position increases used margin and reduces free margin simultaneously — potentially increasing the account’s exposure if the market continues to move against the position. Each additional position added to an existing losing position can increase the account’s exposure to further adverse price movements.
Frequently Asked Questions
A margin call is a notification from your broker that your account equity has fallen to or below the required margin level specified by the broker in relation to your open positions. It’s a warning — not an automatic position closure — that prompts you to deposit more funds, close positions, or reduce exposure before equity falls further.
Depending on the broker and account terms, you may receive a notification and may have an opportunity to respond by depositing additional funds, closing some or all open positions, or reducing trade sizes to bring the margin level back above the applicable threshold. If equity continues to fall to the applicable stop-out level, the broker may automatically close one or more positions in accordance with its terms.
A margin call is a warning at a higher equity threshold and may result in the broker automatically closing one or more positions in accordance with its applicable terms. A stop-out occurs at a lower threshold may result in the broker automatically closing one or more positions in accordance with its applicable terms. A margin call may provide an opportunity to act, while a stop-out may result in positions being closed automatically if the applicable threshold is reached.
Margin Level % = (Equity ÷ Used Margin) × 100. If your equity is $800 and your used margin is $500, your margin level is 160%. The lower this percentage falls, the closer you are to your broker’s margin call and stop-out thresholds.
In most retail trading accounts, negative balance protection means your losses on the relevant retail trading account are generally limited to the available funds in that account. However, this protection is not universal across all brokers and jurisdictions — check whether your account includes negative balance protection. Without it, extreme market moves can theoretically result in losses exceeding the deposit.
Risk-management measures may include using a stop-loss before opening a trade, avoiding maximum available leverage, considering a defined risk limit for position sizing, monitoring free margin on open positions, and carefully considering whether to add to losing positions. These measures may help manage exposure and maintain a greater buffer relative to applicable margin-call and stop-out thresholds, but they cannot guarantee that a margin call or stop-out will not occur.
Conclusion
Understanding what a margin call means can help you respond appropriately if one occurs. The potential impact of a margin call can be greater when you are unfamiliar with the applicable thresholds, do not understand how stop-losses work, or underestimate how quickly leveraged positions can affect account equity. The traders who never see a margin call aren’t the ones who are always right about market direction. Risk management can include considering position size, stop-losses and available free margin when assessing potential trades.
Note: CFDs are complex financial instruments and come with a high risk of losing money swiftly owing to leverage. You should be aware of all the risks associated with trading, and if you have any doubts, seek advice from an independent financial advisor.
This content is for educational and informational purposes only. It is not investment advice, financial advice or a suggestion to trade any financial instrument.
Want to explore more? For a guide on how leverage ratios affect margin requirements, see the forex leverage guide or a worked example of gold trading in the XAUUSD margin guide.
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