What is Free Margin Level in Forex Trading?
Free margin is the available amount in your trading account to open new trades. It is calculated by deducting used margin from equity. It is also called usable margin.
If you make any profit, your free margin increases and if you make losses, your free margin decreases.
The amount of money you have in your trading account is your account balance. If you don’t have any open positions or trades, that means your equity is the same as your trading balance.
Now if you have an open position, the available amount which you can use to open new positions in the market is called Free margin in Forex.
Let me explain with an example.
Example of free margin in forex
Let’s say you have a trading account with a balance of $1000. You don’t have any open trades or positions. Now we’ll calculate free margin.
Example 01:
- First, let’s calculate equity.
Equity = Account balance + Profit/Loss
As you’re not trading currently and don’t have no open positions, your equity is
Equity = $1000 + $0 = $1000
So the equity is the same as the account balance.
- Now let’s calculate free margin
Free Margin = Equity – Used Margin
You don’t have any open positions which means you haven’t used any margin yet.
So your free margin is
Free margin = $1000 – $0 = $1000
Example 02:
Now you decided to start trading with your $1000 account balance.
You opened a 1 mini lot position with 5% required margin.
- Your Required Margin = Notional Value x Margin Requirement = $10,000 x .04
- Now you have opened a position in the market. Your required margin is your used margin.
- Now your equity is
Equity = Account balance + Profit/Loss = $1,000 + $0 = $1000
- Now let’s calculate free margin
Free Margin = Equity – Used Margin = $1000 – $400 = $600
We also need to note that the profit and loss from the current open positions can also impact free margin in forex.
In this article, we’ve covered what is free margin level in forex and how you can calculate it easily. As a new trader, it is really important to know some major concepts of Forex. Free margin in Forex trading is a very significant concept. It is important to understand the concept of margin levels when you’re trading volatile markets like Forex.