Free margin is equity in a trader’s account not reserved for margin or open positions, which can be used to open new trades. Free margin is also the amount your existing holdings can move against you before you face a margin call.
Changes in market values can impact this important margin balance when trading foreign exchange (“forex” or FX) and other derivative instruments. Here, we’ll dive deep into what you need to know.
What Is Free Margin?
Free margin is the equity in a forex trading account that is not invested in open positions. It is also known as “usable margin” since you can open new positions with your free margin balance.
Margin works differently in forex versus with trading stocks. Margin in stock trading means you trade with borrowed funds and owe interest on the loan. Margin in forex is simply a deposit set aside to cover the potential for very large losses when you trade large amounts of currency.
Free margin in forex tells you how much wiggle room you have on your current holdings before you get hit with a margin call. A margin call can occur when your account’s margin level dips below 100%. You can also face a stop out call when your margin percentage declines below 50%.
Free margin also indicates how much you can withdraw from your account if you have no hedged positions.
How Does Free Margin Work?
In general, margin can be categorized as “used” or “free.”
Used margin is the total amount of all the required margin from all your open positions. Free margin is the difference between equity and used margin — the available margin not taken up by current positions. You can use free margin to open new positions in the forex market.
Within the forex market, free margin is a constantly changing balance. The prices of currency pairs move throughout the day, so the free margin on your account will also fluctuate. Traders must constantly monitor their margin levels during the trading day. The forex market trades 24 hours a day for five and half days a week, so changes can also happen in the overnight hours.
Calculating Free Margin
This is the formula for calculating free margin:
Free margin = equity – used margin
Calculating Equity
This is the formula for calculating equity:
Equity = account balance + unrealized profits – unrealized losses
Free Margin Example
Let’s say you have a forex trading account with 100:1 leverage. Your margin deposit is $100. That means you can trade an amount up to $10,000. Now say you take a $20 position at 100:1 leverage. Your position size controls $2,000 of currency value. That $20 position is locked by your broker. The remaining $80 is your free margin. You can use up to that amount to trade more currency pairs in the FX market.
If the market moves to your benefit, your portfolio’s equity increases. You will have more free margin available as your holdings move in your favor. Free margin declines when the market moves against you, though.
Free Margin vs Used Margin
| Free Margin | Used Margin |
|---|---|
| The amount of margin available to open new positions | The amount held in reserve for existing positions |
| Also known as usable margin | An aggregate of all the required margin from open positions |
| The difference between equity and used margin | Equity minus free margin |
Margin vs Free Margin
| Margin | Free Margin |
|---|---|
| A good faith deposit with a broker when trading forex | The amount existing positions can move against the trader before the broker issues a margin call |
| Collateral to protect the broker from excessive losses by the trader | Total margin minus used margin |
| The amount of money reserved when you open a new position | When free margin is zero or negative, new positions cannot be opened |
Free Margin in Forex
Free margin is important to understand in forex trading. Volatility in your balances can be high due to the amount of leverage employed. Some traders have leverage ratios up to 500:1, while risk-averse traders can simply trade with only their margin. Trading with only your margin means you are not using leverage.
Free margin in forex tells a trader how much more money they can use to open new positions. It is also a risk management indicator, in that it can be seen as a kind of buffer amount before a margin call or forced liquidation is issued.
The Takeaway
Free margin in forex is the equity in a trader’s account that is not reserved in margin for open positions. It is considered the margin available to use for new trades and the amount your current positions can move against you before you get a margin call or automated stop out.
Free margin is an important term to know when trading in the forex market. Forex, with its often high degree of leverage and wide trading hours, can be more complicated than trading stocks and exchange-traded funds (ETFs).
If you have the experience and risk tolerance and are ready to try out trading on margin, SoFi can help. With a SoFi margin account, you can increase your buying power, take advantage of more investment opportunities, and potentially increase your returns.
FAQ
Can you withdraw a free margin?
Yes. Free margin in forex is the amount available to withdraw from your trading account if you have no hedged positions. If you have hedged positions, the amount you can withdraw is your equity minus margin hedges.
Is margin money free?
Margin in forex is your good faith deposit. It is considered collateral you post to trade on leverage. It does not cost you anything since you do not pay interest on that amount or on the amount of assets you control when trading with leverage. Margin is broken down into “used” or “free.” If you have open positions, then not all your margin is free.
Photo credit: iStock/kupicoo
*Borrow at 10%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
SoFi Invest®
SoFi Invest refers to the two investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA(www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of SoFi Digital Assets, LLC, please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Bank, N.A.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SOIN1221523
