What is free margin in Forex, and how is it different from margin? This is a common question among both beginner and experienced traders. If you’re interested in trading larger positions in forex, it’s important to understand key terms like margin and free margin. These concepts play a big role in how much control you have over your trades and how well you manage risk.
In this blog, we’ll explain what is the meaning of free margin and margin in forex in simple terms, show how they are connected, and share some useful tips to help you improve your trading results. Let’s get started!
What Is Margin in Forex?
To answer the question “what is free margin in forex”, it’s better to first understand what margin is. Think of margin like a security deposit in the forex market. But what does that really mean?
Let’s clarify it with a common example: Imagine you’re renting an apartment. The landlord asks for a security deposit of $2,000, while the monthly rent is $6,000. This deposit is a smaller amount that guarantees you’ll fulfill your rental obligations. If you don’t, the landlord keeps the deposit to cover potential losses.
In the forex market, margin works in a similar way. It’s a small portion of your own money that you deposit with your broker to control a much larger position in the market (When you put a portion of your money as margin, it is called used margin.) This is made possible through a tool called leverage, which allows you to trade bigger amounts than what you actually have in your account.
Free margin refers to the portion of your account equity that is not being used as margin. In simpler terms, it’s the amount of money you still have available to open new trades. It represents your available funds that aren’t currently tied up in existing positions and is not considered as used margin.
Free Margin and Leverage
In the section above, we’ve answered the question “what is margin and free margin in forex”. We also mentioned that margin is needed when you want to control larger positions. But what exactly does that mean?
In forex trading, if you have limited funds but want to trade larger amounts, you can use leverage. Leverage allows you to open bigger positions than your actual account balance would normally allow. This is where margin comes in: it’s the portion of your money held as collateral to support those larger trades.
On the other hand, if you trade without using leverage, you’re only trading with the actual money in your account. In this case, no margin is required because you’re not borrowing any additional funds from your broker.
Example 1: Trading Without Leverage (No Margin)
Let’s say you want to buy 100 shares of Company XYZ stock, priced at $50 per share. Since you’re trading without leverage, you need to have the full amount of money in your account to buy these shares.
- Total cost = 100 shares * $50 per share = $5,000
Because you’re not using leverage, you need to have $5,000 in your account to complete the purchase.
There’s no margin involved here. You’re using your own capital for the full trade.
So, in this scenario, you’re trading without leverage, meaning you are fully responsible for the entire cost of the trade and there is no need for margin.
Example 2: Trading With Leverage (With Margin)
Now, let’s say you want to buy 100 shares of Company XYZ stock, also priced at $50 per share, but this time you decide to use leverage. With leverage, you only need to put down a small percentage of the total cost as margin. Let’s assume you’re using 2x leverage (meaning you can borrow up to the same amount you’re investing).
- Total cost = 100 shares * $50 per share = $5,000
With 2x leverage, you only need to deposit 50% of the total cost as margin.
Required margin = 50% of $5,000 = $2,500
Formula to Calculate Free Margin in Forex
With below formula, you can calculate the margin and free margin of your trading account:
- Margin = Trade Size / Leverage
- Free Margin = Equity – Used Margin
According to the previous example, let’s assume the equity in your account is $10,000 (for simplicity). You have already deposited $2500 as margin for the position, so the remaining free margin is:
Free Margin= Equity− Used Margin = 10,000 – 2,500 = 7,500
So, your free margin would be $7,500, which is the amount of capital you can still use to open new positions.
Why Margin is Important in Forex?
Now, you should have a clear understanding of “what is free margin in forex” and “how it’s calculated”. Free margin allows you to open positions by using leverage, which means you can trade more than what your own capital would allow. Instead of using your own money to buy financial assets, you can use your capital as collateral to take out larger loans and buy more securities. The more free margin you have in your trading account, the larger the positions you can open, giving you greater trading potential.
How to Manage Free Margin?
Simply understanding what free margin is in forex isn’t enough, you also need to know how to manage your free margin effectively to get the most out of it. This is where proper risk management becomes essential. By keeping an eye on your free margin and managing your trades wisely, you can protect your account from unexpected losses and stay in the game longer.
- Remember, managing your free margin is crucial when using leverage. While leverage allows you to trade with a larger account and potentially earn bigger profits, it’s a double-edged sword. It also increases the potential for greater losses.
- When using leverage and free margin, it’s important to carefully manage your position size. Avoid using all your free margin on a single position, and strive for diversification in your trades.
- Always use stop-loss orders. The forex market, like all financial markets, is volatile, and fluctuations are inevitable. Being overly greedy can turn all your profits into losses, so make sure to set take-profit orders as well to lock in gains.
- Stay disciplined and avoid emotional decision-making.
- Forex trading can be unpredictable, and acting on impulse or fear can lead to poor decisions. Stick to your plan and strategy, and don’t let emotions guide your trades.
Understanding Free Margin and Margin Level
Besides answering “What is free margin in forex?” It’s also important to understand other related terms, such as margin level and margin call, which you may have heard of but don’t fully understand.
Margin Level is a key metric in trading that describes the correlation between your equity and the used margin in your trading account. It helps you understand the health of your trading account and how close you are to being in danger of a margin call.
You can use the below formula to calculate the margin level:
Margin Level=(Used Margin/ Equity)×100
Example: Imagine you have an account with a balance of $10,000. You open a position using $2,500 of margin. In this scenario, your equity is $10,000, and the used margin is $2,500.
Margin Level=(2,500/10,000)×100=25%
Understanding Margin Call
Now that you understand margin level, let’s move on to Margin Call. A margin call occurs when your margin level drops below a broker’s required threshold, meaning your account no longer has enough equity to cover the margin requirements for your open positions. When this happens, your forex broker may ask you to deposit more capital or close some of your other positions to return the margin level to a safe level.
Imagine you want to buy 100 shares of Company XYZ, priced at $50 per share. Without leverage, you need the full amount of $5,000 (100 shares * $50 per share) in your account to make the purchase. Let’s say your account balance is $10,000, so you’re buying 100 shares with $5,000 worth of your equity.
Now, let’s say the price of XYZ stock drops, and the value of your shares goes down to $45 per share. This reduces your equity, and if it drops too low (below the required margin level), you’ll receive a margin call. The broker will ask you to deposit more funds to avoid the liquidation of your positions.
Difference Between Margin and Free Margin
Before reading this article, you might have felt confused about what “margin” and “free margin” mean in forex trading. But now, things should be much clearer!
In short, margin (also called used margin) is the amount of money you set aside as a deposit or collateral to open a trade.
The rest of your equity, the part of your account that’s not being used for trades, is called free margin.
So now you know what is the difference between margin and free margin:
- Margin is what’s tied up in trades.
- Free margin is what’s left and available for new trades.
Final Thoughts on Free Margin in Forex
In this blog, we explored an important question: What is margin and free margin in forex? We broke down these key concepts to help you better understand how forex trading works, especially when it comes to controlling larger positions using leverage. Whether you’re just starting out or looking to strengthen your trading knowledge, understanding the role of margin and free margin is essential for smart and safe trading.
We also explained how margin acts like a security deposit when you use leverage, and how free margin represents the remaining balance available in your account to open new trades. Knowing how to manage your free margin effectively is just as important as understanding what it is: this is where strong risk management comes into play.
If you’re serious about improving your trading skills, continuing your learning journey is the next step. The ITBFX blog is a great place to find more valuable content, including various trading strategies, tips, and guides tailored for both beginners and experienced traders.
Take the time to explore more, stay informed, and always trade with a clear plan. The more you learn, the more confident and prepared you’ll be in the forex market.
Free margin is your available funds to open new positions in trade. Free margin is calculated by this formula: Equity - Used Margin
If your free margin hits zero, it means that you no longer have available funds to open a new trading position.
Free margin is your available money for new trading positions while used margin, as its name suggests, describes the money you put as collateral for your previous positions.
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