Are you looking for information on free margin in forex trading?
If you are a beginner in forex trading, you’ve probably seen the free margin pop up a lot. Free margin is important to understand as it impacts your trading positions and letting it fall to zero or become negative could have undesirable consequences.
What is Free Margin in Forex Trading?
In simple terms, free margin is the money in a trading account that you can use to trade. It is the money that is not “locked up” due to an open trading position. Therefore, you can use the money to enter new trades.
In Forex trading, free margin is also called “usable margin” since it’s the available amount of money one can “use,” in other words, it’s “usable.” As a Forex trader, you need to think of free margin in two ways;
- The amount of money available to enter a new trade
- The available amount of money your current trading position can move against before getting a stop-out or margin call.
Used and Required Margin
Required margin is the amount of money locked up and put aside on every opened trading position. It is a margin expressed as a specific percentage of a trader’s account’s currency.
If you sum up all the required margin of all open positions, the total amount of margin one gets is known as used margin.
The used margin is the amount of money locked up and can’t be used to enter new trading positions. As the name implies, such a margin is being used.
In summary, the required margin is bound to specific trades, while the used margin is the amount of money needed to keep all trades open.
How to Calculate Free Margin
To calculate free margin if you have an open position, subtract your used margin from your equity (your account balance plus or minus loss/profit incurred from an open position).
First, let’s define equity. It is the total amount of all the funds in your trading account.
Free Margin = Equity – Used Margin
For example, if your used margin is $100 and your equity is $1,000, your free margin is $900 ($1,000 – $100 = $900).
However, if you don’t have any open positions, your free margin equals your balance.
Free Margin = Balance
Please note that when free margin equals zero or negative, you can’t open new trading positions.
Why Free Margin is Important
Free margin represents the difference between your equity and used margin. Free margin is quite important in Forex trading as you use it to tolerate negative price fluctuations from open trades.
That’s not all; the free margin also allows traders to enter one or more trade positions enabling traders to earn from multiple currency pairs simultaneously.
It’s vital to know that your free margin decreases with losing positions and increases with profitable positions. When your free margin drops to zero or negative, your broker activates the margin call which automatically closes all your open positions. This prevents your equity from dropping below the required margin.
What is a Good Margin Level in Forex Trading?
In Forex trading, margin level is the percentage (%) value established on the amount of equity against the used margin. Margin level enables traders to know the number of funds available to open a new trade.
As a rule of thumb, the higher your margin level, the more free margin you have to open new positions. On the other hand, the lower your margin level, the less free margin you have to open new positions. As a trader, you do not want to have less free margin when trading as it could result in a margin call or stop out.
So what is the ideal margin level? If you intend to keep trading and opening new positions your trading level must not be less than 100%. A margin level of less than 100% will see most exchange platforms denying you from opening new positions. Therefore to keep your trading light green, ensure you maintain a margin level of above 100%.
What if My Free Margin Drops to Zero?
As a trader in the Forex market, you do not want your free margin to fall to zero. Why? Because it implies that you’re very close to liquidation. Once your free margin drops to zero, you immediately get a margin call.
A margin call signifies that all you have left in your trading account is your required margin, and there are no funds in your account to maintain existing trades. When this happens, you have two options available to you:
- You can deposit additional funds to restore your balance
- You can close some of your open trades to at least restore your maintenance margin
If you fail to do any of these, your broker will automatically close all your open positions.
How to Increase Your Free Margin
In Forex trading, equity increases as floating profits increase, ultimately increasing your free margin. This means, in an open position, free margin increases as equity increases and decreases as equity increases.
If you’re experiencing a decrease in free margin, you can easily increase it by depositing additional funds into your trading account. Aside from this, increasing your equity by making profitable trades is the other method to increase your free margin.
Is There a Minimum Free Margin to Forex Trade?
You need a free margin to open new positions when trading Forex. Therefore, if your free margin is at zero or less, you won’t be able to trade new positions.
The Differences Between Margin, Free Margin, and Margin Level
Margin is the security or collateral that a trader must deposit with their exchanger to insure some of the risks associated with trading the trader creates for the broker. Margin is generally a portion of a trading position in terms of percentage.
On the other hand, free margin is the total amount of funds in a trading account that is used to enter new trades. You calculate free margin by deducting the used margin from equity.
InForex, the margin level enables traders to know the number of funds available to open a new trade. It is the equity divide by the margin times 100; it is represented as a percentage. It’s a vital concept that indicates the ratio of equity to used margin.
How Bad is Negative Free Margin in Forex?
Every Forex trader should avoid negative free margin like the plague. As a trader, you should be overly cautious as negative free margin is an indication that your losses have exceeded margin requirements. This implies that you’re close to liquidating your open trades which is undesirable!
To solve a negative free margin, you need to deposit extra funds into your trading account or close a few trades to restore the maintenance margin.
Free margin is the total amount of funds in a trading account that you can use to open new trades.
Without free margin, you won’t be able to trade in the Forex market. Therefore, it is important to keep an eye on your free margin while growing and maintaining your trading account.
Above all, understanding the basic concepts of margin, margin level, free margin, margin call, and how to calculate your free margin will keep you away from loss in the Forex market.