What is Free Margin in Forex?

Free Margin is the collateral (or security) that a trader has to deposit with their broker to cover some of the risk the trader generates for the broker. It is usually a fraction of open trading positions and is expressed as a percentage. It is useful to think of your margin as a deposit on all your open trades. Choose your quick section of our Free Margin review below.

A Quick Overview of our Free Margin Review:

• ✔️Overview of free margin
• ✔️Understanding and using margin
• ✔️Calculating your margin requirement
• Understanding margin level
• Understanding Free Margin
• Understanding margin and leverage
• Forex trading using margin accounts
• How to use leverage

The margin required by your FX broker will determine the maximum leverage you can use in your trading account. Therefore, trading with leverage is also sometimes referred to as "trading on margin".  

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Overview of free margin

The margin required by your FX broker will determine the maximum leverage you can use in your trading account. Therefore, trading with leverage is also sometimes referred to as "trading on margin". Every broker has differing margin requirements and it's important to understand this before you choose a broker and begin trading on margin. Trading on margin can have varying consequences. It can influence your trading outcome either positively or negatively, with both profits and losses potentially being seriously magnified. In this article, we will explore the difference between margin, free margin and margin level, and finally, we will take a closer look at the best way to trade on leverage.  

Understanding and using margin

As already noted, Margin trading in the Forex market is the process of making a good faith deposit with a broker in order to open and maintain positions in one or more currencies. Margin is not a cost or a fee, but it is a portion of the customer’s account balance that is set aside in order trade. The amount of margin required can vary depending on the brokerage firm and there are a number of consequences associated with the practice. A core, at its very essence, involves borrowing to increase the size of a position and is usually an attempt to improve returns from investing or trading. For example, investors often use margin accounts when buying stocks. The margin allows them to leverage borrowed money to control a larger position in shares than they'd otherwise be able to control with their own capital alone. Margin accounts are also used by currency traders in the forex market. Trading forex on margin enables traders to increase their position size. Margin allows traders to open leveraged trading positions, giving them more exposure to the markets with a smaller initial capital outlay. Remember, margin can be a double-edged sword as it magnifies both profits and losses, as these are based on the full value of the trade, not just the amount required to open it. The leverage available to a trader depends on the margin requirements of the broker, or the leverage limits as stipulated by the relevant regulatory body, ESMA for example.  

Calculating your margin requirement

Margin is usually presented as a percentage amount of the full position—0.25%, 0.5%, 1%, 2%, and so on. You can calculate the maximum leverage you can use with your trading account based on the margin required by your broker. The margin that you have to put up entirely depends on the amount that you're trading. It's important not to put too much on margin, because otherwise you'll lose everything if your trades prove to be duds. The formula for calculating the margin for a forex trade is simple. Just multiply the size of the trade by the margin percentage. Then, subtract the margin used for all trades from the remaining equity in your account. The resulting figure is the amount of margin that you have left.  

Understanding margin level

Margin level is the margin that a trader has available to open further positions. Expressed as a percentage, it is the ratio of equity to used margin. When it drops to 100% this means that all available margin is in use and no further trades may be opened. It is calculated as follows: Margin Level = Equity / Margin * 100. Margin Level allows you to know how much of your funds are available for new trades. The higher the Margin Level, the more Free Margin you have available to trade. The lower the Margin Level, the less Free Margin available to trade, which could result in a Margin Call or a Stop Out Margin Level is very important. Forex brokers use margin levels to determine whether you can open additional positions.  

Understanding Free Margin

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). In other words, Free Margin is the difference between Equity and Used Margin. Free Margin refers to the Equity in a trader’s account that is not tied up in margin for current open positions.  Free Margin is also known as Usable Margin because it is still available for trading. If you have no free margin, you will not be able to open any new positions or your positions will be stopped out. In certain circumstances, your account balance can become negative should the loss on the positions stopped out exceed your account balance. Your positions will get liquidated if the account balance is below the margin requirement.  

Understanding margin and leverage

In trading, leverage is the opportunity provided by a forex broker to open a speculative position worth a much larger amount of money than you have at your disposal. The rest of the funds are thus lent to you from the company whose services you are using. For this financing, a client owes the broker an interest for each day he decides to keep his position(s) open overnight. Leverage is expressed in ratios like: 200:1, 100:1, 50:1, etc. Margin is expressed in percent of the full amount of the position (0.5%, 1%, 5%, etc.). It can vary significantly between companies and between the various asset classes. Generally speaking, the more liquid a financial instrument is, the lower the margin (hence, higher leverage) a trading company will require from its clients for it; and vice versa. Although leverage is expressed as a ratio, while margin is displayed in percentage terms, they basically show one and the same thing: a 0.5% margin requirement means that you are using a leverage of 200:1. As part of the general terms and conditions of a forex broker, margins and leverage are subject to change at any moment, sometimes even without a prior notice. This is of significant importance for you, as it directly affects your account.  

Forex trading using margin accounts

When trading on a margined account it is crucial for traders to understand how to calculate the amount of margin required per position if this is not provided on the deal ticket automatically. Be aware of the relationship between margin and leverage and how an increase in the margin required, lessens the amount of leverage available to traders. Monitor important news releases with the use of an economic calendar should you wish to avoid trading during such volatile periods. It is considered prudent to have a large amount of your account equity as free margin. This assists traders when avoiding margin calls and ensures that the account is sufficiently funded in order to get into high probability trades as soon as they appear. Margin accounts are operated by the investment broker, and are settled in cash each day. Equities are not the only investment type that margin accounts are suited to – currency traders in the forex market regularly use them too. To begin, forex traders need to sign up with their preferred broker. Once they are registered, they will need to set up a margin account. You can expect the type of account you hold with a broker to have an impact on the available margin and leverage. If you hold a standard account only with a broker, the available leverage is likely to be considerably lower, and the margin required to secure that leverage will be higher. This is because you are likely to be less experienced and working with smaller amounts of money than those who hold higher-level accounts, such as professional and VIP. Brokers take on a certain amount of risk with every client, and when engaging in margin trading the risk to the broker is higher. There is likely to be more faith with clients who hold a higher-level account, so superior margins and leverage will be available. In short, the more prestigious your account type with the broker, the better your ratio of leverage to margin will be.  

How to use leverage

Investors use leverage to enhance the profit from forex trading. The forex market offers one of the highest amounts of leverage available to investors. Leverage is essentially a loan that is provided to an investor from the broker. The trader's Forex account is established to allow trading on margin or borrowed funds. Some brokers may limit the amount of leverage used initially with new traders. In most cases, traders can tailor the amount or size of the trade based on the leverage that they desire. However, the broker will require a percentage of the trade's notional amount to be held in the account as cash, which is called the initial margin. Standard trading is done on 100,000 units of currency, so for a trade of this size, the leverage provided might be 50:1 or 100:1. A higher leverage ratio, such as 200:1, is usually used for positions of $50,000 or less.   Many brokers allow investors to execute smaller trades, such as $10,000 to $50,000 in which the margin might be lower. However, a new account probably won't qualify for 200:1 leverage. Although the ability to earn significant profits by using leverage is substantial, leverage can also work against investors. For example, if the currency underlying one of your trades moves in the opposite direction of what you believed would happen, leverage will greatly amplify the potential losses. To avoid a catastrophe, forex traders usually implement a strict trading style that includes the use of stop loss orders to control potential losses. A stop-loss is a trade order with the broker to exit a position at a certain price level. In this way, a trader can cap the losses on a trade.   Professional traders usually trade with very low leverage. Keeping your leverage lower protects your capital when you make trading mistakes and keeps your returns consistent. Many professionals will use leverage amounts like 10:1 or 20:1. It's possible to trade with that type of leverage regardless of what the broker offers you. You have to deposit more money and make fewer trades. No matter what your style, remember that just because the leverage is, there does not mean you have to use it. In general, the less leverage you use, the better. It takes the experience to really know when to use leverage and when not to. Staying cautious will keep you in the game for the long run.  

Conclusion

Margin trading in the Forex market is the process of making a good faith deposit with a broker in order to open and maintain positions in one or more currencies. Margin is not a cost or a fee, but it is a portion of the customer’s account balance that is set aside in order trade. The amount of margin required can vary depending on the brokerage firm and there are a number of consequences associated with the practice. Margin and leverage are among the most important concepts to understand when trading forex. These essential tools allow forex traders to control trading positions that are substantially greater in size than would be the case without the use of these tools. It is important to note that in leveraged forex trading, margin privileges are extended to traders in good faith as a way to facilitate more efficient trading of currencies. As such, it is essential that traders maintain at least the minimum margin requirements for all open positions at all times in order to avoid any unexpected liquidation of trading positions. Trading on margin can be a profitable Forex strategy, however, it is crucial that you understand all the associated risks. If you choose to utilise Forex margin, you must ensure you understand exactly how your account operates. Be sure to read the margin agreement between you and your selected broker carefully, if something is not clear to you, you should ask your broker to clarify.  

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