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Free margin is the capital in a trader’s account that isn’t reserved for margin or open positions and is available to be used to open new trades. Free margin is also the amount your existing holdings can decline before you face a margin call.
Changes in market values can impact this important margin balance, especially when trading foreign exchange (forex or FX) and other derivative instruments. For investors, free margin can be an important concept to understand, and an important metric to track.
Key Points
• Free margin, also called usable margin, is the capital in a trading account that isn’t being used as collateral for open positions and can be used to open new trades.
• Free margin equals equity minus used margin, and can be used to cushion against losses from market volatility.
• Free margin can show how much your current position can move against you before your broker may issue a margin call or a stop-out.
• Because currency pair prices fluctuate, free margin in forex accounts shifts throughout the day, and active traders must monitor it regularly.
• Forex’s high leverage ratios make free margin especially critical, as it acts as a buffer against forced liquidation of your positions.
What Is Free Margin?
Free margin is the equity in a leveraged trading account that isn’t currently tied up as collateral for open positions.
It’s also known as usable margin since you can open new positions with your free margin balance. Investors can use free margin as a safety buffer to absorb market fluctuations, or to open new trades.
Margin works differently in forex versus stock trading. Margin in stock trading means you trade with borrowed funds using your stock holdings as collateral, and owe interest on the loan. Margin in forex is simply a deposit set aside to cover the potential for 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. Each broker is different, but a margin call can occur when your account’s margin level dips below 100%.
You may also potentially face a stop-out call, which is a forced sale of the assets in your account, when your margin percentage falls below a broker-defined, margin-based threshold.
Free margin also indicates how much you can withdraw from your account if you have no hedged positions.
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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 if sufficient margin is available.
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-a-half days a week, so changes can also occur overnight.
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Calculating Free Margin
This is the formula for calculating free margin:
Free margin = Equity – Used Margin
One similar element in investment accounts is excess margin — the collateral held in a margin account in excess of the minimum to maintain the account’s good standing.
Excess Margin = Total Account Equity – Minimum Maintenance Requirement
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 may theoretically 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.
Be aware that having free margin available also provides a cushion to absorb losses in the case of market volatility. Letting your free margin fall too low could potentially result in a margin call.
Free Margin vs Used Margin
There are some key differences to know between free margin and used margin:
| Free Margin | Used Margin |
|---|---|
| The amount of margin available to open new positions | The amount held in reserve as collateral 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
Similarly, there are some differences to understand between margin and free margin:
| Margin | Free Margin |
|---|---|
| A good-faith deposit with a broker when trading forex. | The amount that 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’re not using leverage.
Free margin in forex tells a trader how much more money they can use to open new positions. It’s 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.
One of the advantages of using a margin account, if you qualify, is that a margin loan gives you the ability to buy more securities. Be sure to understand the terms of the margin account, though, as buying on margin includes the risk of bigger losses.
The Takeaway
Free margin is the equity in a trader’s account that is not reserved in margin for open positions. It’s 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, as well. Forex, with its often high degree of leverage and wide trading hours, can be more complicated than trading stocks and exchange-traded funds (ETFs).
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FAQ
Can you withdraw free margin?
In a general margin account, you can withdraw free margin or take a margin loan against your securities. Investors often withdraw free margin for personal expenses like taxes, purchases, or debt consolidation.
In a forex account, you can withdraw your equity minus margin hedges.
Is margin money free?
Margin is your good-faith deposit used as collateral to open and maintain leveraged trading positions. It allows you to control a larger position size than your account balance by using leverage rather than paying the full value upfront. Margin isn’t free money but is split into “used” or “free,” and when you have open positions, not all of your margin is available.
What happens when your free margin runs out?
When your margin runs out, you can no longer open new trades. Further, your broker may issue a margin call, which would require you to deposit additional funds to secure your position, or trigger a stop-out, which automatically closes your open trades to prevent a negative balance.
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