Margin Close-Out What is margin trading? Margin trading means that you don’t pay the full price of the asset. Instead, you only pay a fraction of the underlying security value, and the broker lends the rest of the money you need for the margin trade. Margin trading allows you to profit from the price fluctuations of assets that otherwise you wouldn’t be able to afford. Trading on margin can improve gains but increases the risk and size of any potential losses. There are two types of margins traders should be aware of. The money you need to open a position is your required margin. It’s defined by the amount of leverage you are using, which is represented in a leverage ratio. 2:1 leverage = 50% margin 5:1 leverage = 20% margin 10:1 leverage = 10% margin 20:1 leverage = 5% margin 30:1 leverage = 3.3333% margin There are also limits on keeping a margin trade running, which is based on your overall used margin – the amount that needs to be covered by equity (overall account value). The broker requires you to cover your margin by equity to mitigate risk. If you don’t have enough money to cover potential losses, you may be put on a margin call, meaning you either top up your account or close your loss-making trades. If your trading position/s continues to worsen you will face a margin close-out. What is margin close-out? A margin close-out is the automatic closure of one or more open trading positions by the trading platform, when the retail trader’s account equity falls below 50% of the required margin. This process is triggered to prevent account losses from spiralling into further losses, protecting both the trader from potentially larger losses and the broker from excessive risk. It’s a safety mechanism that occurs when the trader doesn’t have enough funds to cover the margin requirements for their open trades. It is also a regulatory requirement in the EU to ensure responsible trading practices. How does it work? If the market moves against a trader’s open positions, the equity in their account decreases, and their margin level falls. When the margin level drops to a warning threshold (1%), the broker issues a margin call, prompting the trader to either deposit more funds or close positions. If the margin level continues to fall and reaches a critical “close-out” level” (50%), the platform automatically closes positions, starting with those that have unrealised losses, until the account’s margin level is back above the required threshold. In very fast-moving markets, a margin close-out can happen with little to no warning if the margin level drops suddenly.