Free Margin
A margin can be classified as either used or free. A used margin is the total amount of funds that are currently “locked up” to maintain all open positions. A free margin refers to the difference between the equity and used margin.
What Is a Free Margin?
It is the equity in a trader’s account that is not tied up in margin for current open positions. It can also refer to the amount that is available for opening new positions and the amount that the existing positions can move against the trader before they receive a margin call. The FM acts as collateral against losses, therefore when it hits zero, this leads to a margin call, and new positions cannot be opened.
When the trader does not have any positions, money from their account cannot be used as the required margin. Therefore, all of the money that they have in their account is free. Additionally, account equity and Free Margin are the same as the account balance. As a rule, trading systems do not allow opening a new position if the account does not have enough FM. If a trader has open positions and they are currently profitable (floating profit), their equity will increase, which means that they will have more FM, and vice versa.
Free Margin Calculation Example
To calculate the FM, you first need to calculate equity. Let’s suppose that a trader does not have any OPs and has a $10,000 deposit in their account. Equity can be calculated according to this formula:
Account Balance + Floating Profits or Losses
The absence of OPs means that the trader has no floating profits or losses, so the equity will be the same as balance, i.e. $10,000. No OPs also means the absence of any used margin, so the FM would be still $10,000 (equity minus the UM). As a result, if the trader does not have any open positions, their balance, equity, and FM would be the same. If the trader has an open position, they need to calculate the required margin, used margin, and equity before they can calculate the FM.
Let’s assume that the trader has $10,000 in their account and would like to open a long USD / CAD micro lot (1,000 units) position with the standard requirement of 2%. As USD is the base currency, the notional value of the position is $1,000. The formula of the required margin is Notional Value x Margin Requirement, i.e. $1,000 x 0.2 = $200. As the trader has only one open position, the UM will be the same as the required margin, i.e. $200.
Now it is time to calculate equity. If there is no floating profit or loss, the equity again equals the balance, i.e. is $10,000. As a result, the FM is $10,000 - $200 = $9,800 (equity minus the UM).
Summary
A free margin is a number of funds in a trader’s account that is available to open new positions. Having not enough FM may not allow the trader to do that. An FM is calculated according to the following formula: Equity – Used Margin. If the trader has no open positions, their equity and FM are the same as the account balance. If they have OPs and there is a floating profit or loss, they need to first calculate the required and used margins as well as the equity. Only after that, they can calculate the FM. The required margin equals the notional value (the number of units in a lot) multiplied by the margin requirement for the chosen currency pair.
