What is Free Margin in Forex Trading?

Q: What is Free Margin in Forex Trading?

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.