Understanding Free Margin

Free Margin is the amount of money in your trading account that is available to open new positions or sustain existing ones. Essentially, it is the usable capital not currently locked up as required margin.

Key Concept: Equity

Free Margin calculation relies heavily on your account's Equity. Equity represents the true value of your account at any given moment:

  • Equity = Balance + (Profit or Loss from all Open Positions)

Free Margin Calculation Formula

Free Margin is calculated by subtracting the required margin for your currently open trades (Used Margin) from your total Equity:

Free Margin = Equity - Used Margin

Example Scenario

The following example illustrates how the required margin affects your available capital.

Step 1: Establishing the Trade

  • Asset: EUR/USD
  • Volume: 2 Lots
  • Entry Rate: 1.20
  • Total Transaction Value: US$240,000 (2 lots * $120,000 effective price)

Step 2: Calculating Required Margin (Used Margin)

If the broker requires a margin based on 1:50 leverage, the calculation for the locked capital is:

  • $240,000 / 50 = $4,800 Required Margin

This $4,800 is the Used Margin, and it is subtracted from your Equity to determine your Free Margin.

Step 3: Impact of Price Change

If the price of EUR/USD subsequently fell to 1.1905, the position would incur a loss:

  • Price Change: 1.20 - 1.1905 = 0.0095 (or 95 pips).

This open loss immediately reduces your Equity. To find the new Free Margin, the loss (converted into its dollar value) must first be subtracted from the Balance to find the new Equity, before subtracting the $4,800 Used Margin.

The resulting value would be the trader's updated Free Margin.


Detailed Summary

Free Margin represents the capital available in a trading account for opening new positions or supporting existing ones, defined as the usable money not currently held as required margin. Its calculation is dependent on Equity, which is the account's current value (Balance plus open profit or loss). The primary formula for Free Margin is Equity - Used Margin. The text provides an example where a 2-lot EUR/USD trade requires a $4,800 margin (Used Margin) based on 1:50 leverage. Any subsequent loss on the position immediately reduces the Equity, which in turn lowers the resulting Free Margin, demonstrating how market fluctuations impact available trading capital.

Key Takeaways

  • Free Margin is the capital available in a trading account to initiate new trades or maintain current ones.
  • It is the usable capital not locked up as required margin.
  • The calculation of Free Margin relies on Equity.
  • Equity is calculated as: Balance + (Profit or Loss from all Open Positions).
  • The primary formula is: Free Margin = Equity - Used Margin.
  • Used Margin is the amount of capital required (locked up) to maintain current open positions.
  • An example illustrates that a $240,000 transaction value, with 1:50 leverage, results in a $4,800 Required Margin (Used Margin).
  • Any open loss or profit resulting from a price change immediately impacts the Equity, thereby altering the resulting Free Margin.