Margin, Margin Call, and Stop Out: When Exactly Does Your Account Close?

Four terms, four formulas: balance, equity, used margin, free margin

The numbers on the bottom bar of the platform screen are not arranged randomly; each one derives from the previous one. Reading them in order is the fastest way to see how the system works.

Balance is solely the result of closed trades. No matter the status of your open positions, the balance does not change; the moment you close a position, profit or loss is recorded to the balance. Therefore, balance is a number that shows the history of your account, not its instant status.

Equity is the true instant value of the account. Its formula is simple: Equity = Balance + profit/loss of open positions. This is the amount you would have left if you closed all your positions right now at the market price. The entire margin mechanism looks at this number, not the balance.

Used Margin is the collateral blocked in your account to hold the position you opened. Its formula: Used Margin = Position Size / Leverage. This money does not leave your account, it is merely frozen; it is released when the position is closed.

Free Margin is the remaining amount to open new positions or absorb losses from existing positions: Free Margin = Equity - Used Margin. As losses grow, equity decreases, and because used margin remains fixed, free margin melts away. The resilience of the account lies in this number.

• –Balance = net result of closed trades (unaffected by open positions)
• –Equity = Balance + profit/loss of open positions
• –Used Margin = Position Size / Leverage
• –Free Margin = Equity - Used Margin
• –Margin Level (%) = (Equity / Used Margin) x 100

Why is margin level the only true dashboard?

The fifth formula above compresses the other four into a single percentage: Margin Level = (Equity / Used Margin) x 100. The broker's systems monitor your account through this percentage; margin call and stop out thresholds are also defined according to this percentage.

Reading the number is intuitive. If the margin level is 1000%, your equity is ten times the blocked collateral; the position's capacity to carry loss is wide. When it drops to 200%, you have equity equal to twice the collateral left. If it is 100%, your equity is exactly equal to the blocked collateral; meaning free margin is zero and your capacity to open new positions is exhausted.

The critical point here is this: as the percentage decreases, the numerator changes while the denominator usually remains fixed. Used margin is determined according to the size and leverage at the moment you open the position, and does not change as long as the position remains open. The only thing that changes is equity. Therefore, the speed at which the margin level drops is directly the speed of your loss, and the speed of loss depends on the position size.

That is why the margin level is not a "risk indicator," but the risk indicator itself. If a single number needs to be monitored in an account with open positions, it should be this percentage, not the profit/loss figure.

Numerical scenario: 1.000 $ account, 1:500 leverage, 1 lot EURUSD

Now let's work through the formulas in a single example to the end. Assumptions: there is 1.000 $ in the account, leverage is 1:500, the EURUSD rate is 1.10, and a 1 standard lot (100.000 units) buy position is opened. We do not include items like spread and swap in order not to cloud the arithmetic.

First, position value: 100.000 units x 1.10 = 110.000 $. Next, used margin: 110.000 / 500 = 220 $. Free margin is 1.000 - 220 = 780 $. At the moment of opening, the margin level is (1.000 / 220) x 100 = approximately %455.

In a standard lot, 1 pip in EURUSD is worth approximately 10 $. That is, every time the price moves 1 pip against you, equity decreases by 10 $. For the margin level to drop to %100, equity must equal used margin, i.e., 220 $. The loss required for this is: 1.000 - 220 = 780 $. 780 / 10 = 78 pip.

The result is this: if the price goes 78 pip against you, your equity drops to 220 $ and your margin level becomes %100. In EURUSD, a movement of 78 pip, i.e., approximately 0.0078, is not an unusual move; it is a range that can be seen within many days. At this point, 78 percent of your account is wiped out in a single position, and this is the case even at a high leverage like 1:500.

Repeat the same calculation by changing the leverage: if the leverage were 1:100, used margin would be 1.100 $ and this position could not be opened anyway with a 1.000 $ account. The only thing leverage does is whether to allow you to open the position or not. After the position is opened, what determines the speed of your loss is not leverage, but lot size — because pip value derives from lot size, not leverage.

• –Position value: 100.000 x 1.10 = 110.000 $
• –Used margin: 110.000 / 500 = 220 $
• –Free margin: 1.000 - 220 = 780 $
• –Pip value: approximately 10 $ in 1 standard lot EURUSD
• –Required loss for margin level to be %100: 780 $ = 78 pip
• –At this point equity is 220 $, loss is 78 percent of the account

The main lesson: it is not leverage that wipes out the account, but position size

The most important takeaway from the scenario above is showing that the leverage discussion is often conducted in the wrong place. 1:500 leverage opens the door to open a 1 lot position with a 1.000 $ account. Opening the door and having to enter are not the same thing.

If 0.10 lot had been opened instead of 1 lot in the same account, used margin would be 22 $, and pip value would be approximately 1 $. The loss required for the margin level to drop to %100 would this time require a much larger price movement. Without changing the leverage ratio at all, the account's resilience rises to a completely different level. In other words, the risk dial is not in the leverage setting, but in the lot box.

This does not mean high leverage is harmless. High leverage carries a behavioral risk because it technically makes it possible to open a very large position with a small account; when the system does not set the limit, the investor must set the limit. At XM, maximum leverage can reach up to 1:1000, but this ratio varies by region and legal entity; do not plan without verifying such upper limits for your own account.

Determining position size according to the loss your account can bear turns the entire margin math in your favor. If you want to calculate the pip value and required margin for your own account size and instrument, the Position Calculator shortens this arithmetic.

Why is stop out a liquidation, not a protection?

Stop out is sometimes described as "the broker is protecting you." A more accurate definition is this: stop out is primarily a liquidation mechanism that protects the broker's receivables. Locking in your loss is the result of this process, not its purpose. When the limit of the loss your collateral can bear is reached, the system closes the position at the market price; whether this price is suitable for you is not taken into account.

If there are multiple open positions, which one will be closed first is usually not left to your choice either. Common practice is closing the position with the largest loss first, because that is the trade that pulls the margin level up fastest. This can yield a result contrary to the logic of your strategy: for example, while a leg carried for hedging purposes closes, the other may remain open, leaving your position exposed in an undesired direction.

There is another even more important constraint. The stop out level is not a guarantee, but a trigger. When the price flows continuously, the system may close near that level; however, during major data announcements, weekend openings, or unexpected news moments, the price can jump without trading at all between two levels. This is called a gap. At the moment of a gap, the stop out level can be completely bypassed and the position can close at a price much worse than calculated.

In this scenario, equity can drop below zero; that is, the account can go negative. Negative balance protection comes into play right here: the account's negative balance is reset to zero and you do not owe more than you deposited. XM offers negative balance protection. However, it is necessary to correctly understand what this protection does; it does not protect your capital, it only ensures that your loss is limited to the amount in the account.

The most practical way to manage gap risk is to know high-impact data hours in advance and adjust the position size carried during those hours accordingly. Economic Calendar can be used to see during which hours the probability of such moves increases.

Why margin calculation can differ between hedging and netting accounts

One final technical distinction: the account structure where you can hold both buy and sell positions in the same instrument is called hedging, while the structure where positions in the same instrument are reduced to a single net position is called netting. This preference varies depending on the platform and account type.

In a netting structure, 1 lot buy and 0.6 lot sell turn into a single net position of 0.4 lots, and margin is calculated on this net size. In a hedging structure, the two positions stand separately; depending on the broker's practice, margin can be fully blocked for both legs, applied with a discount, or a different rule can be operated for locked positions.

As a result, a position pair that looks "directionless" on paper can weigh on your margin level more than you expect depending on the account structure. That is why it is not surprising if you see different used margin figures when you open the exact same trades in two different account types. Testing in a demo environment how your own account operates and how it calculates margin on locked positions before risking real money is the cleanest method of verification.

To sum up

The margin mechanism is not mysterious, it is simply sequential. Balance shows the past, equity shows today, used margin is the cost of the position, free margin is your buffer, and margin level reduces these four into a single percentage. Margin call is a warning, while stop out is a liquidation; the thresholds for both vary from broker to broker and are numbers that need to be verified, not guessed.

As we saw in the example of a 1.000 $ account, 1:500 leverage and 1 lot EURUSD, a 78 pip move is enough to wipe out 78% of the account. What produced this result was not the leverage ratio, but a position chosen too large for the size of the account. Leverage opens the door; you decide how much load you carry inside. In cases where gap risk can bypass the stop out level, negative balance protection limits the loss to the amount in the account — XM offers this protection — but it does not protect your capital. The only thing that protects capital is the calculation made before opening a position.

This content is for general informational purposes only and is not investment advice; leveraged trading involves high risk and you can lose all of your capital.