Free margin

What is Free margin in forex and CFD trading

Free margin is the amount of equity in a trading account that is not currently being used as collateral for open leveraged positions, representing the available capital for opening new trades or for absorbing additional floating losses. This value is critical for a trader, as it directly determines the purchasing power and the cushion before a Margin Call is triggered. When a trader opens a position, the required Initial Margin is deducted from the Free margin, reducing the capacity for further trades. A trader can verify the current Free margin in real-time by viewing the Trade or Terminal window on platforms like MT4 or MT5.

Key facts about Free margin

• Definition: The unused portion of a trader’s Equity that remains available for new trades or to cover further losses on existing trades.
• Formula: Free Margin = Equity – Used Margin, where Equity is Balance + Floating PnL.
• Action Indicator: When Free margin approaches zero, the account’s Margin Level decreases, signaling imminent risk of a Margin Call.
• Impact of Profit: Floating profit on open positions increases the Equity, which directly increases the Free Margin available.
• Impact of Loss: Floating loss on open positions decreases the Equity, which directly decreases the Free Margin and limits the ability to place new trades.
• Measurement Unit: Always calculated and displayed in the trader’s account base currency, typically USD, EUR, or GBP.

How Free margin works in forex and CFD trading

Free margin is the dynamic measure of account liquidity and safety, changing continuously with market movements affecting the floating profit and loss (PnL) of open trades.

Calculation follows these steps:

1. Calculate Equity: The platform first determines the current Equity by adding the realized Balance (deposits, withdrawals, and closed PnL) to the unrealized Floating PnL of all open positions. Equity = Balance + Floating PnL
2. Determine Used Margin: The Used Margin is the sum of the Initial Margin required for every open leveraged position.
3. Calculate Free Margin: The Used Margin is then subtracted from the Equity to yield the Free Margin. Free Margin = Equity – Used Margin
4. Trade Capacity Check: Before a new trade can be executed, the system verifies that the required Initial Margin for the new position is less than or equal to the current Free Margin. If the Free Margin is insufficient, the trade is rejected with an Insufficient Funds error.

Example of Free margin with a real trade

A trader has a USD account and two open positions.

Account Status: Account Balance: $10,000 Total Used Margin (Initial Margin for all trades): $2,000

Trade Movements: Trade 1 (EUR/USD Long): Floating PnL = +$500 Trade 2 (GBP/USD Short): Floating PnL = -$300

Step 1: Calculate Total Floating PnL Total Floating PnL = $500 + (-$300) = $200

Step 2: Calculate Equity Equity = Balance + Total Floating PnL = $10,000 + $200 = $10,200

Step 3: Calculate Free Margin Free Margin = Equity – Used Margin = $10,200 – $2,000 = $8,200

Result: The Free margin is $8,200. This is the maximum capital available to the trader for opening new positions or for absorbing future losses before the Margin Call threshold is breached.

How Free margin affects your cost and risk

Free margin is the core metric for managing risk and execution capacity. A high Free Margin means the account is well-buffered against losses, while a low Free Margin suggests the account is heavily leveraged and susceptible to a Stop Out.

Free margin compared with related concepts

Free margin vs Equity

Equity is the actual current value of the trading account (Balance + Floating PnL), representing the true capital, whereas Free margin is the Equity minus the Used Margin. The practical difference is that Equity is what the trader owns, and Free margin is the immediately available trading capital.

Free margin vs Used Margin

Free margin is the capital available for new trades, representing uncommitted funds, whereas Used Margin is the capital locked as collateral for open trades. The two concepts are inversely related; Equity is the sum of Free margin and Used Margin.

Broker differences in Free margin across the industry

The key difference among brokers regarding Free margin is in how their systems calculate the underlying components (Equity and Used Margin), particularly concerning bonuses and hedged trades.

How to verify Free margin on your trading platform

The Free margin is a standard display field on most trading platforms, providing immediate account status. Using MetaTrader 5 (MT5) as an example:

1. Log into Platform: Open the MT5 platform and ensure you are logged into your trading account.
2. Open Terminal Window: Open the Terminal window by clicking View → Terminal or pressing Ctrl+T.
3. Select Trade Tab: Ensure the Trade tab is selected at the bottom of the Terminal window.
4. Locate Free Margin Value: Locate the summary section, which lists Balance, Equity, Margin (Used Margin), and Free margin.
5. Read Free Margin: Read the value displayed next to the Free margin label; this is the capital available for trading in the account’s base currency.
6. Monitor Value: Monitor this value continuously; as floating losses increase, the Free margin will decrease in equal measure.
7. Sanity check: Equity should always equal the sum of Margin (Used Margin) plus the Free margin.