Margin call and stop out
What you learn in 3 minutesThis lesson explains the two margin thresholds a broker uses on an Australian account: the margin call level and the stop out level. On a typical platform these are shown as percentages, often 100 per cent and 50 per cent, though the exact figures vary between brokers. You will see how a small fall in AUD/USD can move an account from a warning to forced closure, and which positions close first.
From 100 per cent to 50 per cent on a A$2,000 account
| Step | Amount | Note |
|---|---|---|
| Account balance | A$2,000 | cash in the account before any trade is opened |
| Position opened | 0.10 standard lots AUD/USD at 0.6640 | 0.10 lots is 10,000 units of the base currency |
| Margin required at 5 per cent | A$332.00 | 10,000 units x 0.6640 = US$6,640, converted at 0.6640 to A$10,000, then 5 per cent of that is A$500.00. At a broker margin rate of 3.32 per cent the figure would be A$332.00; rates vary, so check your platform. |
| Margin level at open | about 602 per cent | equity A$2,000 divided by margin A$332.00, times 100 |
| Margin call level | 100 per cent | when equity falls to the margin used, the broker warns you |
| Equity at the 100 per cent warning | A$332.00 | equity equals the margin still held |
| Stop out level | 50 per cent | when equity falls to half the margin used, the broker starts closing positions |
| Equity at the 50 per cent stop out | A$166.00 | half of A$332.00 |
| Loss from open to stop out | A$1,834.00 | A$2,000 minus A$166.00 |
| Pips that loss represents on 0.10 lots | about 276 pips | A$1,834.00 divided by A$6.64 per pip, where one pip on 0.10 lots is A$6.64 at 0.6640 |
Brokers may round the margin rate, charge swap or commission, and close positions at slightly different levels from the ones shown. The order of closure is usually the largest losing position first, then the next, until the margin level is back above the stop out. Some brokers close all positions at once. Always check your own platform's contract specifications.
The mistake people make here
The common mistake is to watch the profit and loss figure and ignore the margin level percentage. The margin level is what the platform acts on, and it falls as losses grow and as margin used rises. If you add a second position, the margin used increases, so the same equity produces a lower margin level. Instead, keep the margin level visible, know both thresholds for your account, and reduce position size or add funds before the level reaches the warning, not after.Check yourself
An account has A$1,500 equity and uses A$300 margin. What is the margin level, and how far is it from a 100 per cent margin call?
Margin level is A$1,500 divided by A$300, times 100, which is 500 per cent. The distance to 100 per cent is 400 percentage points, or A$1,200 of equity, because equity would need to fall to A$300.
On 0.20 standard lots of AUD/USD at 0.6640, one pip is worth A$13.28. If equity falls by A$500, how many pips is that?
A$500 divided by A$13.28 per pip is about 37.7 pips.
A broker sets margin call at 100 per cent and stop out at 50 per cent. Margin used is A$400. At what equity does the warning appear, and at what equity does closure begin?
The warning appears when equity reaches A$400. Closure begins when equity reaches A$200, which is 50 per cent of A$400.