Free margin is a term used in Forex trading to describe the available balance in a trader’s account that is available for opening new trades. It is the difference between a trader’s account balance and the margin requirement. The concept of free margin is essential for traders, as it determines the amount of capital available to open new positions and manage existing ones.
Margin is the amount of money that a trader must deposit with a broker to open a position. It is a form of collateral that ensures that the trader has enough funds to cover any potential losses. The margin requirement is the amount of money a trader must deposit to open a position. The margin requirement varies depending on the currency pair, the broker’s policies, and the size of the position.
The calculation of free margin is straightforward. It is the difference between the account balance and the margin used for open positions. For example, if a trader has an account balance of $10,000 and has opened positions with a margin requirement of $2,000, the free margin in the account would be $8,000.
Free margin is vital for traders as it determines the amount of capital available to open new positions or to add to existing ones. Traders must always maintain a sufficient level of free margin to avoid the risk of a margin call. A margin call occurs when the margin level falls below a certain level, typically 100%, and the broker closes out some or all of the trader’s positions to prevent further losses.
The margin level is the ratio of the equity to the margin used for open positions. It is calculated by dividing the equity by the margin used and multiplying by 100. For example, if a trader has an account balance of $10,000 and has opened positions with a margin requirement of $2,000, the margin level would be 500%. A margin level of 100% means that the account is fully margined, and there is no free margin available.
Traders must monitor their margin level regularly to ensure that they have sufficient free margin to maintain their positions. If the margin level falls below 100%, the broker may issue a margin call, and the trader must deposit additional funds to maintain the positions.
Traders can increase their free margin by closing out losing positions, reducing the size of open positions, or depositing additional funds into their account. It is essential to maintain a sufficient level of free margin to avoid the risk of a margin call, which can result in significant losses.
In conclusion, free margin is the amount of capital available to open new positions or add to existing ones. It is the difference between the account balance and the margin used for open positions. Traders must monitor their free margin regularly to avoid the risk of a margin call, which can result in significant losses. Maintaining a sufficient level of free margin is essential for successful Forex trading.
