What is Free Margin in Forex trading?
In its simplest definition, Free Margin is the money in a trading account that is available for trading. To calculate Free Margin, you must subtract the margin of your open positions from your Equity (i.e. your Balance plus or minus any profit/loss from open positions). For example, if someone with a Balance of $10,000 were to buy 2 lots of EURUSD at the exchange rate of 1.20000, he would need $240,000 (200,000 X 1.2000). His required margin for this particular position would be 240,000/50 = $4800. Now, let’s say that the price of EURUSD drops to 1.19050 after he entered the trade. This would mean that he incurred a loss of 0.00950 pips (1.20000 – 1.19050), which is equivalent to $2280 ($240,000 X 0.00950). So, using the Free Margin formula, the trader’s free margin in this case would be Equity ($10,000 – $2280) minus Margin ($4800) = $2920.Why is my Free Margin important?
Your free margin – also called ‘usable margin’ - is there to withstand any negative price fluctuations in your open trades, and to open new leveraged trades. It increases with profitable positions and decreases with losing positions.What is a safe level of Margin for my forex trading account?
In forex trading, any Margin Level above 100% is considered healthy. It’s calculated as the ratio of your Equity to the Margin you’re using for open positions, using the formula: (Equity/Used Margin) x 100.For example:
If your equity is $8,000 and you’ve used up $2,000 of your margin, your Margin Level is ($8,000/$2,000) x 100 = 400%.
What happens if my Free Margin drops to zero?
With no margin left to cover any potential losses from open forex positions, you’ll receive a Margin call . At this point you’ll need to either top up your account, close all your open positions, or both.How can I increase my Free Margin?
If your open positions prove to be profitable, your Equity will increase, which means that you’ll have more Free Margin. Of course, you can also add money to your account deposit.What is a good level of margin in forex?
Anything above 100% is considered healthy. If your trading account drops below that level, it’s best to top up your deposit.What if my margin level runs low without me noticing?
When markets move against your open positions, your margin level falls. If it ever falls close to a fixed percentage agreed with your broker, say 40%, you’ll be notified with a Margin Call.For example:
Your margin call is set at 40%, and your balance is $5,000. But you take $3,800 of losses and have used up $1,000 of margin. Your margin level is now: ($5,000 - $3,800) / 1,000 x 100 = 120%. If it drops another 80% you’ll receive a margin call.
Then it’s time to either deposit more money in your trading account or close losing positions, to free up more margin.
