Margin call and Stop Out

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margin callWe have discussed before the meaning of leverage and trading on margin

Let us introduce some simple trading terms.

Balance: The remaining amount in your account

Equity: Your account balance plus your open trades’ profits or losses

Margin(explained before) : The minimum equity required in your account to maintain your open trades

Free Margin : The difference of your equity and the open trades’ margin. ( Equity-Margin)

Margin Level : Shows how many times your Equity can cover the open trades’ margin. (Equity/Margin)

Whenever the Margin Level goes below 100%, or equivalently the Free Margin becomes negative it means your account funds are less than the required amount (Margin) for the open trades. When this happens you will receive a Margin Call from your broker.

Margin Call is when your broker informs you that the above has happened and asks you to deposit further funds in order for your open trades to remain open.

Stop Out: If you do not deposit additional funds under Margin Call and your trades continue to move against you, once your Margin Level drops to a certain percentage (varies by broker) the broker will automatically close the trades to prevent further losses you may not be able to cover.

Check here to see the relationship between Margin and Leverage and how having a big leverage can really protect your account.

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