Margin in forex: what gets frozen, the margin level, and the stop out
Margin is collateral, not a fee. What the four numbers on your platform mean, how to work out how far price can move before a stop out, and why averaging down breaks the margin level.
Margin is the part of your balance the broker freezes while a position is open. It is not a fee and it is not spent: it is collateral, released when you close. What makes margin worth understanding is not the deposit itself but the level, which is the number that decides whether the broker closes your trades for you.
How much gets frozen
Required margin = position value ÷ leverage
1.00 lot of EUR/USD at 1.0850 is $108,500 of exposure:
| Leverage | Margin required |
|---|---|
| 1:30 | $3,617 |
| 1:100 | $1,085 |
| 1:500 | $217 |
Note what does not change: the exposure, the value per pip, and the loss if price moves against you. Only the frozen amount changes. This is the point made in leverage, seen from the other side.
The four numbers on your platform
MetaTrader shows these at the bottom of the terminal, and people trade for years without knowing what the fourth one means.
- Balance: your money with all positions closed. It does not move while a trade is open.
- Equity: balance plus or minus the floating profit and loss of open positions. This is what you actually have right now.
- Margin: the total frozen by open positions.
- Free margin: equity minus margin. What is available to open more, or to absorb losses.
The gap between balance and equity is the one to watch. A balance that looks healthy while equity is far below it means large unrealised losses are being carried. An account statement showing a smooth balance curve and a violent equity curve is describing a strategy that holds losers, which is worth knowing before you copy it.
Margin level, and the two thresholds
Margin level = (equity ÷ margin) × 100, expressed as a percentage.
With $2,000 equity and $400 of margin used, the level is 500%. As losses accumulate, equity falls, and the level falls with it. Two thresholds then matter, both set by your broker and both in its contract terms:
- Margin call, commonly at 100%. A warning. You can no longer open new positions and are expected to add funds or reduce exposure.
- Stop out, commonly between 20% and 50%. The broker starts closing your positions automatically, usually the largest loser first, until the level recovers.
The stop out is the mechanism that empties accounts. It is not a punishment and there is no negotiation: it is automatic, it happens at whatever price is available at that moment, and that moment is typically the worst of the day, in thin liquidity, on a wide spread.
Working out how far you can go
This is the calculation worth doing before a trade, not after. Account: $2,000. Position: 0.50 lots of EUR/USD at 1:100. Margin used: about $542. Stop out at 50%.
- Stop out triggers when equity falls to 50% of $542, which is $271.
- Equity has to fall from $2,000 to $271, so the loss is $1,729.
- 0.50 lots is $5 per pip.
- $1,729 ÷ $5 = about 346 pips of adverse movement.
346 pips on EUR/USD is a lot, so this position is survivable. Run the same numbers on 2.00 lots and the answer is about 78 pips, which EUR/USD can cover in a single session on a surprise. Same account, same broker: only the size changed.
Why systems that average down get stopped out
A strategy that adds to a losing position, whether it is called grid, recovery or martingale, increases margin used at exactly the moment equity is falling. Both sides of the margin level formula move the wrong way at once: the denominator grows while the numerator shrinks.
That is the mathematical reason those systems can produce a long sequence of small wins and then a single catastrophic loss. It is not bad luck. It is the structure. This is covered in the piece on risk management, and it is the first thing to check in any product that does not show its drawdown.
Things that quietly change your margin
- Leverage tiers. Many brokers reduce leverage as position size grows, so a large position requires proportionally more margin than the headline figure suggests.
- Weekend and holiday margin. Some brokers raise requirements before a weekend or a major event, which can trigger a margin call on a position that was comfortable on Friday morning.
- Hedged positions. Whether an offsetting position frees margin depends on the broker and the account type. Do not assume it does.
- Swap. Overnight financing is debited from the balance and therefore from equity, slowly eroding the margin level on positions held for weeks.
What to read next
- Leverage: why the account setting is a limit, not a risk level.
- Lots: the thing that determines the exposure being financed.
- Position size calculator.
Frequently asked questions
What is the difference between balance and equity?
Balance is your money with all positions closed and does not move while a trade is open. Equity is balance plus or minus the floating profit and loss of open positions, so it is what you actually have right now. A large gap between them means big unrealised losses are being carried.
At what point does the broker close my positions?
At the stop out level, commonly between 20% and 50% of margin level, which is equity divided by margin used. It is automatic, it happens at whatever price is available, and that is usually in thin liquidity on a wide spread. The margin call, commonly at 100%, comes first and is only a warning.
Why do grid and martingale systems get stopped out?
Because adding to a losing position increases margin used exactly when equity is falling. Both sides of the margin level formula move the wrong way at once, which is why those systems can show a long run of small wins and then one catastrophic loss.
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