What Is Free Margin In Forex? Know Everything About It

Nearly everyone may trade forex nowadays with the use of margin and leverage. Margin is a deposit made to the broker or business where we hold an account. This helps us to open trading positions. 

But, what is free margin? In simple words, the funds in a trading account that are accessible for trading are known as free margin. You have to delete the margin from the open positions to get your free margin.  

Trading professionals can efficiently manage their accounts by having a solid understanding of margin and free margin. If you are eager to know more, let’s get our expert opinions on it! 

What Is Margin Requirement?

The amount of money that is locked in your account as a result of the company margin requirement is known as the margin requirement. The needed margin is a percentage of the total position value and is mostly called the beginning margin. 

Therefore, the amount of your funds that will be used to open a new position is determined by this proportion.

For instance, opening a position of 1 lot size on the USD/JPY pair will block $1,000 in your account if the needed margin is 1%. In order to open this position, you are required to have a minimum of $1,000 in your fund.  

Different companies may have different requirements for leverage and margin. When you open a position, the margin determines how much of your funds will be locked. That’s why a clear understanding of it is necessary.

What About Free Margin?

Free margin refers to the remaining budgets in your account that you can use to place fresh trades. It is computed by deducting your equity from the used margin. 

For instance, your free margin is $10,000 if your equity is $12,000 and the used margin is $2,000 as well. This sum is open to fresh trades.

Additional cash in your account is banned when you open new positions. Also, the amount after the profit or loss on open positions is known as equity. Thus, free margin is the portion of funds that is still accessible for trading. 

It establishes the maximum number of new trades you can make before receiving a margin call. When your equity drops below the needed margin and you have to make additional deposits to keep your positions open, this is known as a margin call.

Free margin gives traders freedom and enables them to seize the edge of market opportunities. You can benefit from fresh trading possibilities if you have a sizable quantity of free margin available.  

Difference Between Margin And Free Margin

In trading, free margin and margin are two distinct but related ideas. The money required to start and keep up a trading position is referred to as a margin. It serves as collateral to guarantee your ability to pay for any damages. 

In contrast, free margin is the amount of money that is accessible for you to create fresh positions.

So, this means, the margin is a preset amount that the broker sets according to the size of your position and their margin requirements. As long as the position is open, this sum will not change. 

For instance, the margin will be $1,000 if the required margin for a $100,000 stake is 1%.

However, changes in your account equity and the amount of used margin affect your free margin. Also, free margin is impacted by opening or closing positions.

If you have less than zero free margin, you will reach a margin call. This indicates that you lack the resources to support your positions. To stop future losses, the broker could close your positions if this occurs.  

How To Calculate Free Margin?

Knowing how to calculate your free margin will affect your trading success. The free margin formula is easy to use: Equity – Used Margin = Free Margin. 

Your equity will rise if you currently have profitable open positions. As a result, you will have a greater available margin. 

For instance, your equity and free margin increase if your open trades are profitable. You can now open more trades if you so choose.

Conversely, your equity will decline if your open trades are losing money. You will therefore have less margin for error. 

For instance, your equity and your margin both decrease if your transactions are losing money. This restricts how many new trades you may make.

Now, let’s look at an example of how to compute free margin. 

Let’s say you have a $5,000 balance in your trading account. The lot you wish to purchase is EUR/USD. Right now, the price is 1.1030, and the leverage offered by your broker is 1:100. 

$1,103 will be utilized as a margin in this deal. Your free margin will therefore be $3,897 ($5,000 – $1,103).

What Happens If Free Margin Is 0?

You won’t be able to make any further deals if your free margin is 0. To engage in a forex transaction, a minimum amount of money must be spent. 

Your broker will prohibit you from opening a new trade if your free margin is smaller than what is required. This protection makes sure you don’t overextend your account, which could result in large losses. 

In addition, if your account has zero free margins, there is a greater chance that the broker will call for additional money to cover possible losses. 

How Much Free Margin Is Safe?

A margin level above 100% is regarded as safe in forex trading. This indicates that the money utilized for open trades is less than the equity in your account. 

If your margin level is greater than 100%, it means you have more money available than what is being utilized as a margin. This acts as a buffer against margin calls and allows for the absorption of market swings. 

Maintaining a margin level above 100% makes it possible for you to trade without running the danger of having your trades forcibly closed. 

Can Free Margin Be Negative?

If somehow your anticipated losses surpass your margin requirements, the free margin may turn negative. Simply put, the free margin goes negative when your losses exceed your margin. 

This suggests that there is a danger to your account and that you might receive a margin call. In order to keep your positions open, you must deposit more money if your free margin is negative.  

Importance Of Free Margin

Now that you understand the idea of free margin, it’s better to know how it is useful for your trading. The following will give you a better idea: 

Risk Management 

Free margin prevents a margin call on your account by acting as a cushion to absorb losses. 

Maintaining an adequate amount of free margin shields your trading funds from abrupt changes in the market. 

Thus, it lessens the chance of forced liquidation, allowing you to carry on trading. You can endure unfavorable price fluctuations and extend your tenure in the market by practicing effective risk management through free margin monitoring.

Spotting Opportunities

Free margin gives you the adaptability to take advantage of fresh trading chances. You can take on new positions when the market conditions are good and you have a sufficient free margin. 

Potential profits may increase as a result of this flexibility. If there’s not enough free margin available, you could lose out on profitable deals. It lets you spread risk over several positions and diversify your trades.

 Making sensible use of free margin enables you to capitalize on market movements and enhance your trading potential. 

Positions Upkeep

If there is enough free margin, it is possible to maintain current positions without raising more capital. Even if you experience brief losses, you can continue to trade as long as your free margin is adequate. 

The stress of unexpected margin calls and forced closures is lessened due to this steadiness. Your trades will have room to recover and possibly generate a profit. It enables you to maintain holdings throughout market swings without being concerned about sudden liquidation. 

Adaptability 

Your trading approach gains versatility when you use free margin. You may handle several deals at once using it, all without having to worry about account limitations. 

Besides, you are able to modify your holdings in response to developments in the market if you have enough free margin. This adaptability helps you adopt a dynamic trading strategy and react swiftly to changes in the market.  

Stress Management 

Stress and anxiety related to trading can be minimized by keeping an eye on and maintaining an adequate amount of free margin. It gives you peace of mind to know that you have enough free margin to cover losses and place new transactions. 

When there is market volatility, having a well-managed free margin allows you to remain composed and make better decisions. You may enhance your overall trading performance and experience by managing your margin more effectively and reducing stress.

Wrapping Up

Comprehending what is free margin and the computation facilitates efficient management of your trading account. This way, you may better manage risks and prevent margin calls by keeping an eye on your free margin.

Successful traders must comprehend the distinctions between margin, free margin, and equity. The margin in FX is the leading threat indicator. If the margin is higher, you will get less room for working in an emergency event.

So, before you start trading, make sure that you have the right idea about margins, and create a strategy to use these functions in your favor. 

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