Online Currency Trading 101: What Is Free Margin in Forex?

January 12th, 2023

Ready to take your finances into the future and get involved in online currency trading? With trending headlines like “Bitcoin Hits All-Time High,” it may be time to consider taking the plunge. However, it's no secret that the foreign exchange market, better known as Forex for short, is tricky to navigate. With its complex terminology, concepts, and ever-evolving landscape, the forex world can be intimidating — but fear not!

In this post, we will demystify and unpack burning Forex concepts and break down everything you need to know about the free margin in forex trading, so you can jump into the pool with confidence.

First Things First: What Is Margin in Forex Trading & How Does It Work?

Forex trading involves a lot of jargon, and it can be difficult to make sense of everything without some explanation. One such important but often poorly understood term is "margin." In forex trading, a margin is a “security deposit” traders make to a broker to place a trade and leverage their existing capital. 

To offset some of the risk the trader creates for the broker, a trader must deposit the margin with their broker as collateral (or security).  It's just like taking out a loan on your house – you put up a portion of your funds (the margin) as collateral that the broker will hold on to while a forex trade is open as a “safety net” to ensure that you can cover the potential loss of the trade.

Forex margin is typically represented as a percentage (%) and represents a portion of a trading position. Consider your margin as a 'good faith' deposit – a down payment on all of your open trades. 

What Is Used Margin In Forex?

A forex margin can be classified as either “used” or “free.” The used margin is just the total amount currently being “used” or “locked up” to maintain an open position during a trade.

How to Calculate Margin in Forex?

Forex trading can often seem like a mysterious black box with all sorts of calculations that you need to do in order to make the most of it. However, it’s less daunting than it might seem. Margin is simply your trade’s buying power divided by the trade’s size. In other words, it's how much money in your account must be held in reserves to open a particular position.

If calculated correctly, it can make all the difference between successfully landing a big profit or taking a huge loss. So if you want to excel at forex trading, it pays (no pun intended!) to master the art of calculating the forex margin effectively. Luckily, calculating your margin in the world of Forex is not as difficult as it may seem – a pen and paper are all you need!

Imagine a chef stirring up a recipe. All ingredients need to be present in the right proportion for the dish to turn out well, and the same goes for forex trading – margin is essentially just an ingredient that needs to be measured correctly for the trading formula to have success. In forex terms, all you need to do is multiply the size of the trade by the margin percentage and then subtract the margin used for all trades from the remaining equity in your account, and voila! You'll have the amount of margin you have left.

Whether you're just a newbie or an experienced online currency trader, this equation will come in handy whenever you need to assess how much leverage you can use while trading. If you’re not a fan of doing the math yourself, there are many free online trading calculator tools you can use to calculate your forex margin. Whatever you do, don’t forget you’re trading, not cooking, so no tasting allowed!

What Is Free Margin in Forex?

Before getting started with online currency trading, you may want to get up to speed with another crucial concept in Forex: free margin. Free margin is like your personal set-aside fund for investing in currency pairs – so it would behoove you to find out more about its role and importance. Understanding this key formula is critical when it comes to successful online currency trading.

Simply put, free margin is the difference between equity and used margin. In short, it's the account balance or amount of capital available for opening new positions – the money you have remaining after existing trade positions are taken into account. Essentially, it's your financial cushion in case a position moves unfavorably. Think of it as a financial airbag that keeps traders from swimming in debt!

But no matter whether you're dealing with debt or currency trading, always remember that there's some risk involved. So, while free margins may sound attractive – and definitely are for experienced traders who know what they're doing – it pays to do your homework first.

How to Calculate Free Margin in Forex?

If trading Forex has always seemed intimidating and out of reach, take heart: understanding free margin isn't as daunting as it seems! Forex free margin can be calculated by simply subtracting the existing trade's margin used from the total equity in your account. Now you’re probably wondering, "What is account equity?" Sweat not, let’s break it down:

·       Account equity is the sum of the account balance and any unrealized profit or loss from any open positions.

·       Account balance refers to the total amount of funds deposited in your trading account (including the used margin for any open positions).

So, before you deep dive into any trades, make sure to check your free margin and see how comfortable you will be if things don't go as planned.

How to Increase Free Margin in Forex

Now you’re probably wondering: How can I increase my Free Margin? We won’t blame you. After all, who doesn’t love freebies, right? Your equity will rise if your open trades turn out to be lucrative, naturally resulting in a greater free margin for you. Of course, you can always simply increase the deposit in your account.

By implementing the right strategies, you can easily increase your free margin for trading. One way to do so is to take time to examine your trading plan and learn how to adjust it appropriately for different market conditions. Utilizing proper risk management tools, such as stop-loss orders, can also help you minimize losses and maximize profits. Additionally, becoming well-versed in technical analysis will give you a better understanding of entry and exit points.

You can also try reducing your risk per trade – if you keep putting yourself into high-risk trades with large amounts of money, you could lose out in the long run. The key is to be patient and wait for the right moment. More reliable trades with smaller amounts will start increasing free margin over time.  Growing your free margin doesn't have to be as complicated as it's made out to be – just arm yourself with knowledge, then watch those sweet returns pile up!

What Is Margin Level in Forex?

Margin level in forex is a ratio of equity to used margin expressed as a percentage. It is used to measure the available funds you have in your trading account relative to the utilized margin. The higher the margin level, the more funds you can avail for trading or withdrawing from your account, and vice versa.

How to Calculate Forex Margin Level

To calculate the margin level, simply divide your equity by the used margin and multiply the result by 100 for the percentage. For example, if there is $2,000 in your account and you've used $1,500 of margin, divide 2,000 by 1,500. This gives you 1.3333 x 100 = 133.33 – meaning your account has a margin level of 133.33%.

(Used) Margin Vs. Free Margin: What’s the Difference?

In the world of online currency trade, the funds in the account balance required for a broker to keep a trading order open is known as the margin, which is indicated in account currency. The equity that remains after allocating margin from the account balance is referred to as free margin.

Quick Notes: Key Differences to Remember

·       The free margin displayed on the trading platform shows how much money is accessible to open new positions, while the margin reflects the amount of funds being used to keep existing trades active.

·       Margin level calculations are based on losses or gains and will cause an account to reach a margin call if it drops below a certain threshold; free margin does not play a part in this calculation.

·       You can withdraw any available free margin, yet the funds allocated for the used margin cannot be taken out until all trades have been closed. 

Margin Call: What It Is & How to Avoid It

Not knowing what a margin call is can be an expensive lesson to learn. In Forex, a margin call occurs when your balance goes below the amount required to keep open positions you have in the market. Put simply, it’s when your broker has to intervene in a transaction as you don’t have the funds necessary to cover potential losses, essentially asking you to bring more funds into your account before liquidating some of the open trades. 

Not fun, that’s for sure! To avoid this situation, it’s key to understand leverage (the ratio of personal funds to borrowed funds applied to the position) and focus on risk management strategies that help you stay away from unnecessary high risks. Setting stop-loss limits, having sufficient capital reserves to deal with draws, and never trading beyond what’s acceptable will ensure you never experience the dreaded margin call.

Trade Your Way to The Top

Forex provides the ideal platform for traders looking to increase their capital quickly. With the right strategies, trading is not only simple but also fun! Now that you understand what “free margin” is and how it can be used in currency trading to help safeguard your investment and amplify potential gains – why not start trading now

Take your knowledge and put it to good use by trading currencies with US First Exchange – your gateway to the world’s currencies. Buy or sell any currency today with our secure online platform and insured shipping options. Jump on board the currency trading train and join the millions who benefit from profitable and successful investments every day. 

The world of Forex awaits you!

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