Lesson 7: What Is Free Margin?

Previously, you’ve learned the concept behind used margin, right? Don’t throw your notes yet—you’ll need those when learning what free margin is.  

So, what’s free margin? Simply, free margin is the free or usable amounts from your account equity. Unlike used margin, where the amount is locked in, free margin is simply free for you to use.  

Traders also use other terms for free margin, like “usable margin,” “available margin,” or “available to trade.” 

Lesson Highlights

• Unlike used margin, free margin is the amount of equity that a trader can use to support open margin positions or even open a new position.
• A trader must know their trading account equity (E) and used margin (UM) to calculate free margin. After getting the value of the two, use the formula for free margin: FM = E - UM.

Free Margin vs. Used Margin 

Your account’s free margin and used margin are integral factors to consider when trading on margin.  

Understanding free margin is essential to managing risk in the forex market effectively. It acts as a cushion for open trades when the market fluctuates.  

You can use free margin for two things. It allows you to:

1. Open another position 
2. Absorb losses from your open positions 

It’s essential to allot a free margin to your account equity to avoid forced liquidation and margin calls. Also, it helps you quickly join the market if you predict that an asset will be profitable.  

Account Equity 

Your account equity is technically the balance or the potential balance you have in your account.

What does potential balance mean, you ask? 

If you don’t have an open position, your account equity equals your account balance. But your equity will “float” once you enter a position.  

That happens because market fluctuations directly impact your equity. When you have an open position, your equity will move from time to time because of unrealized profit or loss.  

These unrealized amounts will move together with the market. 

To put it into perspective, look at this scenario where Kevin opened a GBP/USD.

Kevin traded on margin to go long 10,000 units of GBP/USD at 1.2000. He started with an equity of USD 5,000.  

After entering the market, he noticed market fluctuating and going in his favor. After several hours, the GBP/USD reaches 1.2600, which means he’s gaining from his position. He looked at his equity and saw that it became USD 5,100. However, the market reversed, which decreased the pair's value to 1.2300. He checked his equity and saw that it declined due to market reversal.

Calculating Free Margin Without Open Positions 

Calculating your free margin is easy when you don’t have any open positions.  

Just look at your account balance; it should be the same as your account equity. That’s because you don’t have any floating profits or floating losses.  

Calculating Free Margin With Open Positions 

If you have an open position, your account equity will change every time your asset moves. Your equity is floating because your positions still have unrealized profits or losses. 

Remember, your account equity is the current value of your trading account. So, if an asset is open, it will either gain or lose value, directly affecting your account equity.  

You should know your account’s exact equity and used margin to calculate free margin.  

1. Used Margin: Sum of all the required margins for all the open positions. If you only have one open position, your used margin will be the same as your required margin.   
2. Account Equity: Current trading account value. If you have no open position, your equity is the same as your account balance. If you have an open position, your equity will move as your floating profits and losses. 

Account Equity Formula:

Equity = Account Balance + Floating Profits/Floating Losses

Once you’ve calculated your used margin and account equity, you can calculate your free margin.  

Assume you have equity of USD 5,000, which moves together with your open positions in EUR/USD and USD/JPY. Respectively, you have required margins of USD 200 and USD 2,000.  

To calculate your free margin, you simply get the sum of your required margins and subtract the value from the equity.  

• Free Margin= USD 5000 - (USD 200 + USD 2,000) 
• Free Margin= USD 5000 - USD 2,200 
• Free Margin= USD 3,800 

So, your account has a free margin of USD 3,800 to support your open position or open a new trade. to avoid getting margin calls, ensure that your equity meets the minimum equity level your broker requires.  

In the next lesson, you’ll discover what margin level is and why keeping a close eye on it would make your trading less risky and gambler-ish.