Forex trading is all about buying and selling currencies. Traders use margin trading to amplify their profits and losses. Margin trading is a technique where traders borrow funds from their broker to increase their buying power. This allows them to trade larger positions than their account balance would allow. When traders use margin trading, they must maintain a certain amount of funds in their account. This amount is known as the margin or free margin.
Free margin in forex trading is the amount of funds available in a trader’s account to open new positions. It is the difference between the total equity in the account and the margin used. Equity is the balance of the account plus or minus any profits or losses. The margin used is the amount of funds the trader has used to open positions.
Free margin is important because it determines the trader’s ability to open new positions. When the free margin is low, the trader may not be able to open new positions or may be forced to close existing positions. This can happen if the market moves against the trader and the losses deplete the free margin.
To understand the concept of free margin, let’s look at an example:
Suppose a trader has a $10,000 account balance and wants to open a position in the EUR/USD currency pair. The broker requires a margin of 2% for this pair. This means the trader needs to deposit $200 in margin to open the position.
After opening the position, the trader’s account balance is reduced to $9,800, and the margin used is $200. The free margin is therefore $9,600 ($9,800 – $200).
If the trade goes in the trader’s favor and the position gains $500, the account balance increases to $10,300, and the free margin becomes $10,100 ($10,300 – $200). The trader can now use this free margin to open new positions or increase the size of the existing positions.
On the other hand, if the trade goes against the trader and the position loses $500, the account balance decreases to $9,300, and the free margin becomes $9,100 ($9,300 – $200). If the free margin falls below the margin requirement, the broker may issue a margin call, requiring the trader to deposit additional funds to maintain the position. If the trader fails to deposit additional funds, the broker may close the position to prevent further losses.
In summary, free margin in forex trading is the amount of funds available in a trader’s account to open new positions. It is calculated as the difference between the total equity in the account and the margin used. Free margin is important because it determines the trader’s ability to open new positions and maintain existing positions. Traders should always monitor their free margin to avoid margin calls and potential losses.
