Forex margin is collateral set aside to support an open position, not a fee or the maximum possible loss. Leverage lets a trader control a larger position than the cash committed as margin. While leverage magnifies gains, it also magnifies losses relative to the account.
Equity is the account balance plus or minus unrealised profit or loss. Used margin is the amount currently reserved for open positions. Free margin is equity minus used margin, and margin level is equity divided by used margin, multiplied by 100. These figures change as prices move.
A margin call occurs when equity falls too close to the required margin under a broker’s rules. The broker may warn the trader to add funds or reduce exposure, although procedures vary. If the margin level reaches a lower stop-out threshold, the broker may automatically close positions to limit further losses. Thresholds and the order of closure differ by broker and account. Fast markets and gaps can cause losses beyond a stop-loss level; protections against negative balances also vary.
For example, suppose a dollar account has $1,000 and opens one standard lot of EUR/USD (100,000 euros) at 1.0000 with 1:100 leverage. The position is worth $100,000 and requires about $1,000 in margin, leaving almost no free margin before costs. A 10-pip adverse move is roughly a $100 loss, reducing equity to about $900 and margin level to 90%, assuming used margin remains $1,000. At an exchange rate above 1.0000, required dollar margin would be higher, so the trade might not be accepted with only $1,000.
To reduce the risk, size positions conservatively, use stop-loss orders as part of a plan, and keep a buffer of free margin. Check the broker’s thresholds and monitor correlated positions, spreads and volatility. A stop-loss is not a guarantee of an exact exit price.
For further detail, see how margin calls work, with examples
