How it works
When a leveraged position moves against the trader, account equity falls. Brokers calculate margin level continuously: equity divided by used margin × 100. When this drops below the broker’s margin-call threshold (commonly 100 percent for retail, lower for institutional), the broker notifies the trader and demands action. If equity continues to fall to the stop-out level (commonly 50 percent), the broker automatically closes positions starting from the largest losing one until the account is back above the threshold.
Example
A trader has $10,000 equity and opens a position requiring $2,000 margin. Margin level starts at 500 percent. The position loses $7,500: equity drops to $2,500, margin level falls to 125 percent. Below 100 percent (equity below used margin) triggers margin call. At stop-out (equity = $1,000, margin level 50 percent), the broker closes the position automatically at whatever price the market gives, locking in the loss. The trader cannot recover from a stop-out by waiting for price to reverse; the position is gone.
Why it matters
Margin calls are how leveraged accounts blow up. A 2 percent adverse move at 50:1 leverage equals 100 percent account loss; the stop-out forces realisation before recovery is possible. Defence: position-size so that the worst plausible move would bring margin level to no lower than 200 percent. Never add to a losing leveraged position to avoid margin call without an explicit thesis change; that simply enlarges the eventual loss. Regulated brokers under ESMA rules apply negative-balance protection, but extreme gaps can still bypass it.
