Free Margin is simply the amount of money accessible in the trading account for opening deals. It is calculated using the following formula and represents the difference between Equity and the Used Margin on the Trading Account:
Equity - Margin equals Free Margin
The Equity and free Margin would rise if you had open positions in the trading account that were currently successful.
Free Margin, in its most basic form, is the sum of money in a trading account that is accessible for trade. Therefore, it would be best if you deducted the Margin for your open positions from your Equity (i.e., your balance minus or plus any profit or loss from open positions) to determine the free Margin.
The essence of Free Margin
Your free Margin, also known as "usable margin," serves as a buffer against any negative price changes in your open trades and as capital to start new leveraged deals. It rises when a position is profitable and falls when it is unsuccessful.
Two items can be considered as free Margin:
The number of vacant NEW posts that are open.
The number of existing holdings can shift against you before you get a stop out or a margin call.
Calculating Free Margin
For instance, if someone wanted to purchase two lots of EURUSD at the exchange rate of 1.20000 with a Balance of $10,000, he would require $240,000. (200,000 X 1.2000). For this specific position, his necessary Margin would be 240,000/50, or $4800. Let's imagine that after he entered the deal, the price of the EURUSD fell to 1.19050. This would indicate that he lost $2280 ($240,000 X 0.00950), or 0.00950 pip (1.20000 - 1.19050), on the trade. In this instance, the trader's free Margin would be Equity ($10,000 - $2280) minus Margin ($4800) for a total of $2920 using the Free Margin calculation.
This is the formula for calculating the free Margin:
Free Margin = Equity – used Margin
Let's look at an illustration to see how this functions in real life:
With no open positions and a balance of $10,000 in our trading account, we can calculate our free Margin using the technique above.
Step 1: Determine Equity:
First, we must calculate our Equity. If there are no open deals, this is simple to do because Equity is calculated as follows: 10,000 = 10,000 + 0 + 0 + 0 + 0.
In this instance, our Equity and balance are identical.
Step 2: Determine the Free Margin
Knowing our used Margin is necessary now that we are aware of our Equity. The Used Margin in this example will be 0, as there are no open positions.
Utilizing the equation: Free Margin=Equity - Margin
Our Free Margin is equal to 10,000 USD less zero.
FINAL INSIGHT
A free Margin is a balance continually shifting in the currency market. Because currency pair prices change throughout the day, your account's free Margin will also change. Therefore, throughout the trading day, traders must constantly monitor their margin levels. Since the currency market is open five and a half days a week, 24 hours a day, adjustments can occur overnight.
Your portfolio's Equity rises if the market changes in your favor. This is because as the value of your holdings increases, you will have more free Margin available. However, free Margin decreases when the market goes against you.
