All trade accounts consist of two different kinds of margin — “free” and “used.” Used margin is fairly straightforward, an aggregate of all the required margin (in open slots). More specifically, when a forex trader opens a position for a trade, their initial deposit is held by the broker as collateral. The total amount that the broker has locked up to keep the forex trader’s positions open is the used margin.

Defining Free Margin

In the simplest of terms, your free margin is your “usable margin.” This is any equity not currently being used as margin for open positions. As such, it can be used for new open positions.

Calculating Free Margin

When your used margin is profitable, your overall equity will increase, and this means your free margin will as well. Likewise, positions that are unprofitable will cause your equity to go down and therefore decrease your free margin. Keep this equation in mind:

Equity – Used Margin = Free Margin

Example 1 – No Open Positions

Let’s say you just opened your trading account, kicking things off with a deposit of $1,000. If you don’t have any open positions yet, then your free margin is extremely easy to calculate. Start by figuring out your equity:

Equity = Account Balance + Floating Profits / Losses
or
$1,000 = $1,000 + $0

Since your free margin is just your equity subtracting the used margin (Free Margin = Equity – Used Margin), this means your free margin is also $1,000.

Example 2 – With an Open Position

Now let’s say you take that $1,000 trading account and decide to enter a portion of it into a long USD/JPY trade. You start by opening one mini lot position, worth 10,000 units or valued at $10,000. For this position, the required margin is 4 %.

To calculate your free margin, you’ll first need to determine the required margin monetary amount:

Required Margin = Notional Value x Margin Requirement
or
$400 = $10,000 x .04

Once you’ve determined the required margin (which in this example is $400), you can calculate your used margin:

Used Margin = Required Margin x Positions Open
or
$400 = $400 x 1

See? Since your only open position is one mini lot with a required margin of $400, your used margin is also only $400. The amount would obviously fluctuate with a greater number of trades.

Now, you can calculate your equity, which will be the last step we’ll need to take before being able to determine the free margin. Let’s say you are breaking totally even:

Equity = Account Balance + Floating Profits / Losses
or
$1,000 = $1,000 + $0

So, with your equity balance at $1,000, your free margin calculation will be as follows:

Free Margin = Equity – Used Margin
or
$600 = $1,000 – $400

Summary

Remember: your free margin is your equity balance that is available for use and not “locked” in a position.

Some people find it easier to view free margin as simply the sum of the used margin and free margin. Of course, this will still require the same calculations as above. When your free margin is at zero or negative, you are unable to open new positions.

 

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