Understanding margin levels and stop-out levels is crucial for forex traders, as different brokers have varying policies. In this scenario, we’ll explore what happens when a broker sets a Margin Call Level at 100% and a Stop Out Level at 50%.
This article will guide traders on how margin works, how losses can impact their equity, and the risks of not managing trades properly. If you’re trading forex in Pakistan, understanding these concepts is key to avoiding account liquidation.
Step 1: Deposit Funds into Trading Account
You deposit $10,000 into your trading account. This is your starting balance.
| Position | FX Pair | Position Size | Entry Price | Current Price | Margin Level | Equity | Used Margin | Free Margin | Balance | Floating P/L |
|---|---|---|---|---|---|---|---|---|---|---|
| – | – | – | – | – | – | $10,000 | – | $10,000 | $10,000 | – |
Step 2: Required Margin Calculation
You go long GBP/USD at 1.30000, opening a 1 standard lot (100,000 units) position with a Margin Requirement of 5%.
- Notional Value Calculation:
- £1 = $1.30
- £100,000 = $130,000
- Required Margin:
- $130,000 × 5% = $6,500
Since this is the only open position, Used Margin = Required Margin = $6,500.
Step 3: Equity and Free Margin Calculation
- Equity = Balance + Floating P/L
- $10,000 = $10,000 + 0
- Free Margin = Equity – Used Margin
- $3,500 = $10,000 – $6,500
- Margin Level Calculation:
- (Equity / Used Margin) × 100%
- (10,000 / 6,500) × 100% = 154%
| FX Pair | Position Size | Entry Price | Current Price | Margin Level | Equity | Used Margin | Free Margin | Balance | Floating P/L |
| GBP/USD | 100,000 | 1.30000 | 1.30000 | 154% | $10,000 | $6,500 | $3,500 | $10,000 | $0 |
Step 4: Market Drops 400 Pips! Margin Call Warning!
- New Price: 1.26000
- Floating Loss:
- (1.26000 – 1.30000) × 100,000 × $10 = -$4,000
- New Equity:
- $6,000 = $10,000 – $4,000
- New Free Margin:
- $6,000 – $6,300 = -$300
- New Margin Level:
- (6,000 / 6,300) × 100% = 95% (Below 100%, triggering a Margin Call!)
| FX Pair | Position Size | Entry Price | Current Price | Margin Level | Equity | Used Margin | Free Margin | Balance | Floating P/L |
| GBP/USD | 100,000 | 1.30000 | 1.26000 | 95% | $6,000 | $6,300 | -$300 | $10,000 | -$4,000 |
At this point, you receive a Margin Call warning, meaning you cannot open new positions unless you deposit more funds or close trades.
Step 5: Market Drops Another 290 Pips! Stop Out Triggered!
- New Price: 1.23100
- Floating Loss:
- (1.23100 – 1.30000) × 100,000 × $10 = -$6,900
- New Equity:
- $3,100 = $10,000 – $6,900
- New Free Margin:
- $3,100 – $6,155 = -$3,055
- New Margin Level:
- (3,100 / 6,155) × 100% = 50% (Stop Out Level reached!)
| FX Pair | Position Size | Entry Price | Current Price | Margin Level | Equity | Used Margin | Free Margin | Balance | Floating P/L |
| GBP/USD | 100,000 | 1.30000 | 1.23100 | 50% | $3,100 | $6,155 | -$3,055 | $10,000 | -$6,900 |
Since the Margin Level has reached 50%, the broker automatically closes your trade to prevent further losses.
Your final account balance is now $3,100, meaning you’ve lost 69% of your capital.
Key Takeaways for Forex Traders in Pakistan
- Margin Calls Occur at 100%: If your Margin Level drops to 100%, you cannot open new positions.
- Stop Outs Happen at 50%: If your Margin Level drops to 50%, the broker automatically closes your trades.
- Proper Risk Management is Crucial: Use stop losses and manage leverage to avoid liquidation.
- Monitor Equity and Free Margin: Ensure your account is not over-leveraged, reducing the risk of Margin Calls.
- Be Aware of Market Volatility: High volatility can trigger Margin Calls and Stop Outs faster than expected.
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