What is Free Margin in Forex Trading?
Quick Answer: Free Margin is the amount of money in your trading account available to open new positions. It's calculated as Equity minus Used Margin. When free margin drops too low, you risk a margin call - always maintain at least 30% of your balance as free margin buffer.
Understanding Free Margin in Forex
Free Margin is the amount of money in your trading account that is available to open new positions. It's calculated as your Equity minus your Used Margin (the margin tied up in current trades).
The Formula
Free Margin Calculation:
Free Margin = Equity - Used Margin
Understanding the Components
To understand free margin, you need to know:
- Balance - Total cash in your account (only changes when trades close)
- Equity - Current value of your account (Balance +/- floating profit/loss)
- Used Margin - Money "locked" as collateral for open positions
- Free Margin - Money available for new trades
Practical Example
Account Status:
- Balance: $10,000
- Open position requires: $1,000 margin (Used Margin)
- Current floating profit: +$500
- Equity: $10,000 + $500 = $10,500
- Free Margin: $10,500 - $1,000 = $9,500
You have $9,500 available to open new positions.
Why Free Margin Matters
Free margin is critical for several reasons:
- Opening new trades - You need sufficient free margin to open positions
- Risk management - Low free margin means you're close to maximum risk
- Margin calls - When free margin approaches zero, you risk a margin call
- Account health - High free margin = healthy account with room to trade
What Happens as Trades Move
Free margin changes dynamically:
✓ Winning Trade
Equity increases → Free Margin increases
More money available for new positions
Lower risk of margin call
✗ Losing Trade
Equity decreases → Free Margin decreases
Less money available for new positions
Higher risk of margin call
Free Margin vs Margin Level
Don't confuse these two metrics:
- Free Margin - Dollar amount available (e.g., $5,000)
- Margin Level - Percentage showing account health (e.g., 500%)
- Formula: Margin Level = (Equity / Used Margin) × 100%
Managing Free Margin
Professional traders follow these rules:
- Never use all free margin - Keep at least 30-50% as buffer
- Monitor constantly - Check free margin before opening new trades
- Close losing trades - If free margin is low, cut losses early
- Reduce position sizes - Use smaller lots if free margin is tight
Danger Zone
When free margin drops to very low levels ($100-$500 on a $10,000 account), you're in danger territory. A small adverse move could trigger a margin call and force close your positions. Always maintain healthy free margin levels - at least 30% of your balance as a safety buffer.
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