Trading Fundamentals
What happens when free margin declines and how margin calls and stop-outs may affect open positions.
Account balance is the account value before unrealized profit or loss from open positions is included. Account equity is the balance plus or minus the floating profit or loss of open positions. Equity is important because it reflects the current account value while positions remain open.
When a position is opened, the platform allocates part of the account equity as used margin, which is the amount required to maintain open positions. Free margin is the amount available after used margin is accounted for and may be used to open new positions or absorb losses on existing positions. If open positions move against the account, free margin may decline.
Margin level is the ratio of account equity to used margin, expressed as a percentage. For example, USD 10,000 in equity with USD 2,000 in used margin equals a 500% margin level. If open losses reduce account equity, the margin level may fall. When margin level reaches certain thresholds, margin call or stop-out rules may apply.
A margin call may occur when the account margin level falls below a required threshold. It indicates that account equity has declined relative to used margin and that additional losses may increase the risk of stop-out. Margin call levels vary by broker, account type, and trading conditions.
If the margin level falls below the stop-out threshold, one or more open positions may be closed automatically according to the platform's stop-out rules. Stop-outs are designed to reduce margin exposure, but they do not guarantee that losses will be limited to a specific amount or that positions will close at a specific price.
Traders can monitor margin risk by reviewing position size, used margin, free margin, and overall exposure before and after opening trades. Stop-loss orders, position sizing, margin monitoring, and awareness of correlated positions can help reduce the risk of margin calls, although they cannot eliminate the possibility of losses or stop-outs.
If a margin call occurs, traders may review open positions, available margin, and overall account exposure. Possible responses may include reducing position size, closing positions, or adding funds, depending on the account situation and risk tolerance. Adding funds does not remove market risk, and open positions may continue to lose value if the market moves against them.
Open a free demo account to observe how margin level, free margin, and equity may change using virtual funds in a simulated trading environment.