Margin calls and liquidation

When you trade on margin, the broker's risk rules run alongside your own, and theirs have priority. A margin call is the broker asking for more money; liquidation is the broker or exchange closing your position without asking. Knowing where those lines sit for each market is part of sizing.

Stocks: initial and maintenance margin

In the US, Regulation T lets you borrow up to 50% of a stock purchase (initial margin). After that, brokers require equity to stay above a maintenance level, typically 25% to 30% of the position value, sometimes much higher for volatile stocks.

Equity = position value − loan.

Worked example. $10,000 cash, buy $20,000 of stock, borrowing $10,000. Maintenance margin 25%.

The margin call comes when equity ÷ position value falls to 25%. Let V be the position value:

(V − 10,000) ÷ V = 0.25 V − 10,000 = 0.25V 0.75V = 10,000 V = $13,333

The stock has to fall from $20,000 to $13,333, a drop of 33.3%. Your equity at that point is $3,333, down 66.7% from $10,000. That is what 2× leverage does to a one-third drop.

At 30% maintenance: 0.70V = 10,000, V = $14,286, a 28.6% drop. Equity $4,286, down 57%.

When the call comes you either deposit cash or the broker sells positions, usually at the worst possible time. Note also that brokers can raise maintenance requirements on individual stocks with little notice, which can trigger a call without any price move.

Key idea: On margin, the broker's maintenance line is a stop you did not choose, and it is often reached long after your own stop should have taken you out.

Forex: margin level and stop-out

Forex brokers show a "margin level":

margin level = equity ÷ used margin × 100%

When it falls to the broker's stop-out level (often 50%, sometimes 100% or 20%), positions are closed automatically, largest loser first.

Worked example. $2,000 account, 30:1 leverage, stop-out at 50%. You open 0.5 standard lots of EUR/USD (50,000 units) at 1.0850.

1. Notional = 50,000 × 1.0850 = $54,250.
2. Used margin = 54,250 ÷ 30 = $1,808.
3. Stop-out when equity = 50% × 1,808 = $904.
4. Equity must fall from $2,000 to $904: a loss of $1,096.
5. Pip value on 0.5 lots = $5. Loss per pip = $5. 1,096 ÷ 5 = 219 pips.

So a 219-pip move against you, about 2%, wipes 55% of the account and forces a close. A 2% move in a major pair happens in a bad week. The position was 27× the account; the plan in Module 2 would have put you in 16 micro lots (0.16 lots), where the same 219 pips cost $350, or 17.5%, still far too much, which is why the plan also had a 30-pip stop.

Crypto perpetuals: the liquidation price

Crypto exchanges do not call you; they liquidate. The liquidation price for a long is approximately:

liquidation price ≈ entry × (1 − 1 ÷ leverage + maintenance margin rate)

The maintenance margin rate (MMR) is typically 0.4% to 1% for large coins and higher for small ones. Use 0.5% here.

Entry $60,000 on BTC:

For shorts the formula flips: entry × (1 + 1 ÷ leverage − MMR).

Three things liquidation does that a stop does not:

1. It takes the entire margin for the position, plus a liquidation fee, rather than the amount to your stop.
2. It happens at the exchange's mark price, which can differ from the last traded price during spikes.
3. Under isolated margin only the position's margin is lost; under cross margin the whole account balance backs the position and can be consumed.

At 50× the liquidation line is 1.5% away. BTC routinely moves 1.5% in an hour. At that leverage you are not trading a view on price; you are betting the next hour's noise goes your way.

Bringing it back to sizing

If your stop is correctly placed and your size correctly derived, your stop is always hit before any of these lines. Check it explicitly:

1. Compute the stop's distance in percent. Say 2%.
2. Compute the liquidation or margin-call distance for the leverage you are using.
3. If the second is not comfortably larger than the first (at least double), reduce leverage until it is.

At 10× on the BTC example, liquidation is 9.5% away and a 2% stop is fine. At 20×, liquidation is 4.5% away and a 2% stop has almost no room for a wick. At 50×, the stop is beyond the liquidation line and will never be reached.

Try it: For any perp you might trade, compute the liquidation price at 5×, 10× and 25× using the formula above with a 0.5% MMR, then compare each with the coin's typical daily range. Write down the highest leverage at which a normal day cannot liquidate you.

Recap

• Stock margin call: equity ÷ position value falls to the maintenance level; at 25% maintenance, a 33% stock drop costs 67% of your equity on 2× leverage.
• Forex stop-out: equity ÷ used margin falls to the broker's level, often 50%; oversized lots turn a 2% move into a forced close.
• Crypto liquidation price ≈ entry × (1 − 1 ÷ leverage + MMR); at 50× it is about 1.5% away.
• Liquidation takes the whole margin plus fees, at mark price, and under cross margin can take the whole account.
• Your stop must sit well inside the liquidation distance; if it does not, the leverage is too high.