What is Free Margin?

There are two types of margin: “used” and “free.”

In one of our last sessions, we looked at the Used Margin, which is the sum of all the Required Margin from all open positions.

The gap between Equity and Used Margin is called Free Margin.

Free margin refers to the equity in a trader's record that is NOT tied up in margin for current open trades.

Because it's margin that you can “use”...“usable,” it's free margin and it's called a “Usable Margin.”

The term “free margin” refers to two things:

The number of new posts that can be filled.

The maximum amount that existing holdings can move against you before a Margin Call or Stop Out is issued.

Don't be concerned about the terms “margin call” and “stop out.” They'll be discussed at a later time.

For the time being, just know that they're horrible. You don't want to have them, just like you don't want to have acne breakouts.

The term “free margin” is sometimes used.

Usable Margin, Usable Maintenance Margin, Available Margin, and “Available to Trade” are all terms that refer to the amount of money that is available to trade.

How to Work Out Your Free Margin

Here's how to know your Free Margin:

Equity – Used Margin = Free Margin

There will be increase in your Equity if you have open positions that are profitable at this instant, meaning that your Free Margin is going to be relatively large.

Floating Profits improves the Equity, which in return raises Free Margin.

If you have positions that are open which are losing money, there is going to be a drop in your Equity, and you will have less Free Margin.

Floating losses reduce Equity, lowering Free Margin.

Example: There are no open positions.

Let's begin with a simple example.

You make a $1,000 deposit into your trading account.

What is your Free Margin if you don't have a single position opened？

Step 1: Determine the amount of equity you have.

It's easy to calculate the Equity if you don't have a single opened position.

Equity = Account Balance + Floating Profits (or Losses)

$1,000 = $1,000 + $0

The Equity and the Balance would be the SAME.

You lack floating earnings or losses because you lack open positions.

Step two: Free Margin Calculation

If you lack open positions, the Free Margin and the Equity will still be the SAME.

Free Margin = Equity - Used Margin

$1,000 = $1,000 - $0

Because you lack open positions, no margin is being “used.”

Your Free Margin will be the same as your Balance and Equity as a result of this.

Example: Open a USD/JPY long position.

Let's make things a little more difficult by making a transaction!

Assume you have a $1,000 balance in your account.

Step 1: Determine the required margin.

You wish to go long USD/JPY and open a position of one micro lot (10,000 units). The Minimum Margin Requirement is 4%.

To open the position, how much margin (Required Margin) would you need？

Because the US dollar is the basic currency. This tiny lot is worth $10,000, hence the position's Notional Value is also worth $10,000.

Required Margin = Notional Value x Margin Requirement

$400 = $10,000 x .04

The Required Margin will be $400 if your trading account is denominated in USD and the Margin Requirement is 4%.

Step 2: Determine the Used Margin

There are no other trades open besides the one we just entered.

Because there is just one open position, the Used Margin will be the same as the Required Margin.

Step 3: Equity Calculation

When theres little change in the price (which favors you), then you are now trading in a neither gain nor lose position.

Which implies that you have $0 floating P/L.

Your equity calculation will now be:

Equity = Account Balance + Floating Profits (or Losses)

$1,000 = $1,000 + $0

Your account now has $1,000 in equity.

Step 4: Free Margin Calculation

Free margin can be calculated now, since the equity is known.

Free Margin = Equity - Used Margin

$600 = $1,000 - $400

The free margin equals to $600

Therefore, your free margin plus your used margin equals to Equity.

Equity = Used Margin + Free Margin

Summary

We learned the following in this lesson:

· Free margin is money that is not “locked up” due to an open position and can be used to open more positions.

· Additional positions cannot be opened while the Free Margin is zero or less.

We learned the following in previous lessons:

· What is Margin Trading and How Does It Work？ Learn why it's crucial to understand how your margin account works.

· What is the definition of balance？ The amount of money in your trading account is known as your account balance.

· What is the difference between unrealized and realized P/L？ Understand the impact of profits and losses on your account balance.

· What is the definition of a margin？ When you open a position, you must reserve and “lock up” a certain amount of money.

· What is the meaning of the term “used margin”？ The total amount of margin that is now “locked up” in order to maintain all open positions is known as used margin.

· What is the definition of equity？ The floating profit plus your balance equals your equity.

All of your open positions will be closed (or lost). Let's have a look at the concept of Margin Level now.