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You know what margin is in forex trading, you understand how it is calculated and how it is related to leverage. But what is the free margin in forex?
Free Margin in Forex
Free margin in forex is the amount of money in your trading account that can be used to open new positions. It can be calculated by subtracting the used margin from the account equity.
You may be thinking right now, “What is account equity? Equity is the sum of the account balance and the unrealized gains or losses on open positions. When we talk about account balance, we are referring to the total amount of money deposited into a trading account (this includes used margin for any open positions). If you have no open trades, equity is equal to the trading account balance.
Forex free margin actually includes any unrealized profit or loss from open positions. This means that if you have an open position that is currently in profit, you can use this profit as additional margin.
You can better understand the term free margin by using an example.
Example of Free Margin
Let’s assume we have a trading account with a balance of $1,000 and a CFD margin of 5%. We want to open a position with a value of $8,000. The following is true at the time of opening the trade:
Account balance = $1,000
Margin = $400 (5% of $8,000)
Free Margin = $600 (capital – used margin)
Equity = $1,000
If the value of our position increases, giving us an unrealized gain of $50, we can state the following:
Account balance = $1,000
Margin = $400
Free Margin = $650
Equity = $1,050
Is Margin Money Free?
Forex margin is your bona fide deposit. It is considered a deposit that you make for leveraged trading. It costs you nothing because you pay no interest on that amount or on the amount of assets you control when trading on leverage. Margin is divided into “used” and “free” margin. If you have open positions, not all of your margin is free.
Free Margin vs Used Margin
Let’s look at the difference between the two types of margin:
Free Margin:
- the amount of margin available to open new positions;
- also known as Used Margin;
- the difference between Own and Used Margin.
Used Margin:
- amount held in reserve for existing positions;
- aggregate of all required margin on open positions;
- equity less free margin.
The used margin and account balance do not change, but the free margin and equity increase to reflect the unrealized profit of the open position. It is important to note that if the value of the position had decreased by $50 rather than increased, free margin and equity would have decreased by the same amount.
So, free margin in forex is equity in a trader’s account that is not reserved in the margin for open positions. It is the margin that can be used for new trades and the amount by which your current positions can change for the worse.
Free margin in the forex market can be more complex than trading stocks or exchange-traded funds. And it can require extra attention.
