Forex trading is one of the most popular forms of trading out there.
But even if you do decide to trade Forex, there are still some things that you need to know before you start trading.
One of those things is what is free margin in forex.
In this, I’m going to go through six things you should know about forex free margin.
Let’s get started.
What is Free Margin in Forex?
Free Margin is the difference between your equity and how much margin you have already used.
The equity you have is how much you have in your trading account and the margin already used is the total margin required for all of your open positions.
In other words, it’s how much you have available to open new positions.
However, you must also be aware that free margin is also an indicator of how much you have left in the margin before you get a margin call.
So naturally, it’s unwise to be living life on the edge with a low % of free margin.
There are a lot of traders who think that they don’t need to worry about free margin because they have money in their accounts.
This is not the case.
If your position loses money, you might not be able to cover it and end up having to pay extra money on margin.
So, if you are trading with a large amount of money in your account, you must consider how much margin you will need.
Make sure that you have enough margin so that you won’t have to worry about paying extra money on margin when your position loses money.
You should also look at your positions and see how much margin you have already used on each position.
You may need to sell some of your positions to raise money for margin.
If you are planning to open more positions, you must know how much margin you can use for each position before you decide to add a new position.
You can also ask your broker for advice on how much margin you can use.
Your broker can give you an estimate of how much margin you need so that you can avoid getting into trouble.
Stop losses are your friend here.
What is the difference between margin and free margin in forex?
This is a question we see asked a lot on forex forums.
Margin is what your broker offers you in order to open positions in the market.
Margin allows you to pay a small percentage of the value of the underlying asset in order to control the full asset.
Think like buying a house:
You pay a deposit for the house, the bank offers you the mortgage to purchase the remaining owed on the house.
You live and control the house, but still, pay the mortgage back to the bank.
If the house price value increases, you keep the profit, if it falls, you lose the value.
In forex, it’s the exact same ideology.
For example, if you had £10,000 in the trading account and you would like to open a 0.1 mini lot trading position, most brokers require a 3% margin (or 30:1 leverage).
So for a 0.1 mini lot size on EURUSD, it would equate to you (the trader) putting $300 as margin and the broker will “loan” you the remaining $9,700 to trade.
This is the amount of margin required to open the position.
If you use a stop loss, you can lower the margin significantly depending on your risk management.
Whereas with free margin, this is what is left available to open up new positions.
Using the same example of £10,000 before with $300 (£250) already open in the margin, this would leave you roughly with £9,750 left available of your equality you can put up as margin.
What happens when free margin is 0?
A few things happen when free margin is 0.
However, if your free margin reaches 0 then the broker will intervene and start closing out your open positions at market execution.
(They usually close the ones with the largest losses first)
Most brokers will not allow it to get to 0, they will intervene and liquidate your open positions to regain margin when they assess the risk of your account falling lower.
This is when you get a dreaded margin call, around 20% of the margin level.
They either ask you if it’s feasible to fund the account further to increase your trading capital or let you know that they will have to start closing open positions to recover the margin.
This is something that most brokers will do to protect themselves from high-risk, zero-care, traders.
Depending on your broker, you can set a maximum drawdown limit of your account to avoid your free margin from going low.
If you have a maximum drawdown that gets hit whilst you have a free margin, it means your account’s equity has been reduced by your maximum drawdown level.
E.g) If you set your maximum drawdown level to a 20% loss of your total account and you are 20% down in the markets, then your drawdown rule will execute and liquidate all of your positions to close you out of your trades so you can re-evaluate.
This is a great feature that every trader should use.
What will happen if free margin is negative?
Most retail traders will never see this in their entire trading career.
No, not because they are surviving the markets in a positive way, but instead because brokers will not allow this to happen in today’s world.
Unless you are a professional trader with a WELL established account and history with them, negative free margins won’t happen because they will be closing out your open trades fast.
On the rare occasion where a black swan event happens and brokers are caught off guard, then you may see a negative margin.
This is a case where you will owe the broker money.
Not a great position to be in.
How to Calculate Free Margin in Forex
Free margin varies based on several factors, which means it is constantly changing depending on your current equity and unrealised profit and loss.
For example:
If your open positions are in a profit, this will therefore increase your total equity, which also increases your current free margin.
However:
If your open positions are at a loss, this will therefore decrease your total equity, which also decreases your current free margin.
Don’t worry, this is all calculated in real-time through your account.
What is a good margin level in forex?
The short answer to this question is that it depends on the current market conditions.
If you trade with a large account, you might want to consider a 5-7% per trade
However, if you are trading a small account, then you might want to stick to a 3% margin per trade.
As for free margin, this is down to your risk tolerance again but you want to leave the free margin around 45-55% max to keep yourself in check.
Don’t forget, forex trades are frequent and fast.
So you don’t need 100% exposure to the market 100% of the time.
Conclusion: What Is Free Margin In Forex
So we are finally here, what is free margin in forex trading?
After reading this article, you’ll be able to answer this question!
What part of the article helped you the most?
Let me know on social media.
If you want to learn more about the forex market, you can check out this article below: