Margin

Required margin

When a position is opened the broker locks a portion of the account balance as margin. The amount is the notional value of the position divided by the leverage: one lot of EUR/USD at 1.16 is 116,000 dollars of notional, which at 1:30 requires 3,867 dollars and at 1:500 requires 232. The margin is not a fee and is not lost; it is released when the position closes. It is simply money that cannot be used to open anything else while the position is open.

Equity, free margin and margin level

Equity is the account balance plus or minus the running profit or loss on open positions. Free margin is equity minus the margin locked in open positions, and it is what is available to open new positions or to absorb losses on existing ones. Margin level is equity divided by the required margin, expressed as a percentage, and it is the number the platform watches.

A trader with a 10,000 dollar balance who opens the EUR/USD position above at 1:30 has 3,867 dollars of margin in use, 6,133 dollars free and a margin level of 259 percent. If the position loses 2,000 dollars, equity falls to 8,000, free margin to 4,133 and margin level to 207 percent.

Margin call and close-out

When margin level falls to a threshold the broker sets, commonly 100 percent, the platform issues a margin call, a warning that the account can no longer support its positions and that no new ones can be opened. When it falls further, to the close-out level, the broker begins closing positions, usually the largest loser first, until the level recovers. Under the European and Australian rules the close-out is at 50 percent of required margin; offshore brokers set their own, sometimes as low as 20 percent.

In the example above, a 50 percent close-out is reached when equity falls to 1,933 dollars, a loss of just over 8,000 dollars, or roughly 800 pips on the one-lot position. At 1:500 the same account could hold seventeen lots, and a close-out would arrive after about 50 pips. That is the arithmetic behind the warning that high leverage loses accounts quickly.

Negative balance protection

A close-out is supposed to stop losses at the account balance, but a market can gap through the close-out level faster than a broker can act, as it did when the Swiss franc was unpegged in 2015 and client accounts went deeply negative. Negative balance protection means the broker absorbs any loss beyond the balance and the client owes nothing. It is a legal right for retail clients in Europe, the United Kingdom and Australia and a discretionary policy elsewhere; the broker's terms say which, and the site records it for each entity.

Keeping clear of it

The margin calculator shows the margin a position needs, the share of the account it uses and the move to a close-out. A trader who sizes positions by risk rather than by what the margin allows will find margin level stays in the hundreds of percent and the close-out is never in play. The position sizing article explains how.