Leverage, Margin and Stop Out Explained: How Far Before You Get Closed Out

Leverage is what lets a few hundred dollars in an account open a position worth tens of thousands. Margin is the part of your account set aside as collateral while a position is open. If losses push your equity too low compared with that margin, the platform warns you (margin call) and eventually closes positions for you (stop out). This article works out step by step how many pips against you it takes to get closed out, and why high leverage doesn’t mean more risk per pip, but is a shortcut to a lot size the account can’t carry.

What leverage is

Leverage is written as 1:100 or 1:500. It means 1 dollar in the account can back 100 or 500 dollars of position. Opening an 11,000-dollar position at 1:100 sets aside 110 dollars.

The point people most often get wrong: leverage does not change profit or loss per pip. EURUSD at 0.10 lot is worth 1 dollar per pip whether the account is 1:30 or 1:1000. What leverage changes is how much money is set aside, and so the biggest lot you are allowed to open. If pip value is still fuzzy, read Pips vs lots first.

Maximum leverage depends on the broker, the account type, the instrument and the regulator where you are. In the European Union, for example, retail accounts are capped at 1:30 on major currency pairs and 1:20 on gold. Some brokers also lower leverage for larger lot sizes or ahead of major news.

How used margin is calculated

For pairs that end in USD, and for gold, in a dollar account, the common formula is:

Used margin = contract size × lots × price ÷ leverage

• A standard currency lot = 100,000 units of the first currency in the pair
• Gold (XAUUSD) 1 lot is usually 100 ounces
• Pairs that start with USD, such as USDJPY, skip the price, because the first currency is already dollars: 100,000 × lots ÷ leverage

Contract size and the margin method can differ by instrument and broker. Open the contract specification in your platform (right-click the symbol in Market Watch and choose Specification). To try your own numbers, use the margin calculator.

EURUSD example. A 1,000-dollar account at 1:100, assumed price 1.1000, opening 0.10 lot:

1. Used margin = 100,000 × 0.10 × 1.10 ÷ 100 = 110 dollars
2. Before price moves, equity = 1,000, so free margin = 1,000 − 110 = 890 dollars
3. Margin level = 1,000 ÷ 110 × 100 = 909%

Gold example. Same account, gold at an assumed 4,000 dollars (a number for the calculation, not a price forecast), opening 0.10 lot:

1. Used margin = 100 × 0.10 × 4,000 ÷ 100 = 400 dollars
2. Margin level = 1,000 ÷ 400 × 100 = 250%
3. Gold at 0.10 lot = 10 ounces, so a 1-dollar price move = 10 dollars of profit or loss

Same lot size, but gold uses almost 4 times the margin of EURUSD, because the contract is worth much more.

Equity, free margin and margin level

How to read the numbers in the MT4/MT5 Trade tab:

Number	Meaning
Balance	Money in the account, not counting open positions
Equity	Balance plus the profit or loss of open positions
Margin	Used margin, the money set aside for all open positions
Free margin	Equity − used margin, the money still available for new positions
Margin level	Equity ÷ used margin × 100

Margin is not a fee. Close the position and that money returns to free margin straight away. What actually costs you money is the loss, the spread and other charges such as overnight swap. The difference between balance and equity is covered in detail in Reading drawdown.

Margin call and stop out

While a position is losing, equity falls but used margin barely changes, so the margin level keeps dropping.

• Margin call is a warning level. The platform alerts you; once free margin runs out you can no longer open new positions. Existing positions stay open
• Stop out is the level where the platform starts closing positions automatically. Many platforms start with the biggest losing position and keep closing until the margin level is back above that level

Common numbers are a 100% margin call and a 50% stop out, but plenty of accounts set stop out at 30%, 20% or lower, and some have no separate warning level. The levels vary by broker and account type. Always check your account terms or contract specification.

Stop out is not a guaranteed price. If price gaps at the market open or on news, positions can be closed well below that level. Some brokers offer negative balance protection, and some don’t.

How many pips until you get closed out

Same 1,000-dollar account at 1:100, but now a bigger EURUSD position of 0.50 lot. Assume a 100% margin call and a 50% stop out.

1. Used margin = 100,000 × 0.50 × 1.10 ÷ 100 = 550 dollars. Margin level starts at 1,000 ÷ 550 × 100 = 181.8%
2. 0.50 lot = 5 dollars per pip
3. Margin call when equity = 100% of 550 = 550. Room to lose 1,000 − 550 = 450 dollars = 450 ÷ 5 = 90 pips against you
4. Stop out when equity = 50% of 550 = 275. Room to lose 1,000 − 275 = 725 dollars = 725 ÷ 5 = 145 pips against you

Check: 145 pips against costs 145 × 5 = 725, leaving equity at 275, and 275 ÷ 550 × 100 = 50%, exactly the stop out level.

Notice that the margin call lands exactly where free margin reaches zero, because at 100% equity equals used margin. If your broker sets the margin call at a different level, the warning point moves with it.

High leverage doesn’t raise risk per pip, but it can shrink the buffer

Take gold, a 1,000-dollar account, an assumed price of 4,000 dollars, a 100% margin call and a 50% stop out, and compare three setups:

Setup	Used margin	Margin level at open	Loss per 1-dollar move	Margin call after	Stop out after
0.10 lot at 1:100	400	250%	10	60 dollars	80 dollars
0.10 lot at 1:500	80	1,250%	10	92 dollars	96 dollars
1.00 lot at 1:500	800	125%	100	2 dollars	6 dollars

The first row: stop out when equity = 50% × 400 = 200, so the room to lose is 800 ÷ 10 = 80 dollars of price. The last row: stop out when equity = 50% × 800 = 400, so the room is 600 ÷ 100 = 6 dollars.

Three things to read from the table:

1. Same lot, same loss per dollar. Rows one and two both lose 10 dollars for every 1-dollar move in gold. Leverage doesn’t make you lose faster
2. Higher leverage at the same lot delays the stop out, but you lose more before it comes. At 1:500 the 0.10 lot position is closed after losing 960 of the 1,000 dollars; at 1:100 it’s closed after losing 800. Stop out doesn’t protect the account much in either case
3. The real danger is the lot size leverage allows. At 1:100 this account can open at most 1,000 × 100 ÷ (100 × 4,000) = 0.25 lot of gold. At 1:500 it can open 1.25 lot. Open 1.00 lot and a move of just 6 dollars against you, about 0.15%, triggers the stop out

Leverage decides how big you can go. The lot you choose decides how much you risk. Your risk per trade should come from your Stop loss, not from the stop out

Using margin with risk management

A safe order of thinking:

1. Decide how much you are willing to lose per trade first, for example 1% of the account. See Why risk 1% per trade
2. Work out the lot from your Stop loss distance, as in Position size from your Stop loss, or use the lot calculator
3. Only then check the margin: how much that lot uses, and whether the margin level at open is still comfortably high. If you hold several positions, add up the margin of all of them

When you risk 1% per trade with a real Stop loss, the margin level usually sits very high and the Stop loss always fires long before a stop out. If your margin level at open is below a few hundred percent, the lot is probably bigger than the account can carry.

Systems with no Stop loss, or that add positions while losing, are the ones that tend to end in a stop out, because used margin keeps growing while equity shrinks. More in Grid and Martingale.

Cent and micro accounts

Some small account types let you trade smaller than a standard 0.01 lot.

• Cent accounts show the balance in cents. A 10-dollar deposit appears as 1,000 USC, and profit, loss and margin are all counted in cents, so the same lot number moves far less real money than in a standard account
• Micro accounts are defined differently by each broker. Some use a smaller contract size, some just mean an account that allows 0.01 lot

Margin, margin level and stop out work the same way in all of them. Only the contract size and the currency unit change, so check the contract specification before you calculate. Small accounts are useful for practising with a little real money after a demo account; see From demo to a live account.

Crypto perpetual futures use similar ideas, margin, leverage and forced closing (liquidation), but with different formulas and levels. See Perpetual futures and funding rates.

Common mistakes

• Thinking high leverage means a bigger loss per pip. A big lot causes big losses. At the same lot, the loss per pip is the same
• Sizing from free margin. Being able to open a position doesn’t mean you should. The lot should come from your Stop loss and the money you’re willing to lose
• Using stop out as a Stop loss. A stop out closes positions after most of the account is already gone. It is not a risk management tool
• Forgetting margin adds up. Open several positions or pairs at once and their margin combines, so the margin level drops faster than you expect
• Not checking your account’s stop out level. Every broker and account type differs, and gold and crypto often have different leverage and specifications from currency pairs
• Holding through news or a weekend on a low margin level. Price can gap past the stop out, and positions may be closed at a much worse price than you calculated