Margin is one of the most complex terms of forex trading. It is important to know about margin and margin-related terms before understanding what is free margin in forex. Let us understand what margin is
What is Margin?
Margin is the amount of money a person must have to open a trade account and maintain a position while trading in forex. It is used to determine the amount of maximum leverage that a trader can use.
What is free margin?
Free margin is a difference between the equity (the sum of account balance and unrealized profit or loss) and the used margin.
A quick glance
Margin is the amount of money a person must have to open a trade account and maintain a position while trading in forex.
Free margin is a difference between the equity (the sum of account balance and unrealized profit or loss) and the used margin. It is the amount that can be used for further trading.
Suppose we have a forex trading account with a $2000 balance and a 5% CFD margin. Then we need to open a position that has a $10000 cost.
- Account balance=$2000
- Margin =$500 (5% of $10000)
- Free Margin= $2000-$500= $1500 (Equity – Used Margin)
- Equity= $2000
If your free margin declines to zero, You’ll receive a margin call with no margin left to protect any possible losses from open forex positions.
If your open position is profitable, your equity will grow, giving you an additional free margin. And you can also add money to your trading account.
The margin level is a percentage of the margin available to maintain open positions.
When the margin level of a trader falls below a certain level, he receives a call from a broker. This call is known as a margin call.
What is Free Margin in Forex?
The free margin in your trading account represents the amount of money you can use to trade on the forex market. Also, it is used as capital to open a new trading position. Free margin in forex is also called “Usable margin” because, as the name indicates, it refers to the amount that can be used for further trading.
What happens when the free margin hits zero?
When the trader’s free margin has been zero, the trader cannot open another trading position. So to continue trading in forex, it is important to maintain the amount of usable margin.
If your free margin declines to zero, You’ll receive a margin call with no margin left to protect any possible losses from open forex positions. You’ll need to recharge your account or close all your open positions.
Forex Free Margin Example
Let us understand how to calculate free margin with an example. Suppose we have a forex trading account with a $2000 balance and a 5% CFD margin. Then we need to open a position that has a $10000 cost. At the endpoint of opening the trade, the following is true.
Account balance=$2000
Margin =$500 (5% of $10000)
Free Margin= $2000-$500= $1500 (Equity – Used Margin)
Equity= $2000
If the position value increases, offering us an unrealized $50 profit, we can discover the following things
Equity Account Balance:- $2000
Used Margin = $500
Free Margin =$1550
Equity= $2050mount.
The equity balance and utilization margin do not modify. Yet the forex-free margin and the equity both grow to remember the unrealized profit of the open position.
It is essential to mention that If the position value drops by $50 rather than increases, the Equity and free Margin would have fallen by the same a
Why is margin necessary in Trading Market?
Free margin, also known as usable margin, fights negative price fluctuations in your available trades and opens new leveraged trades. It grows with profitable positions and drops with losing positions.
How to increase Free Margin in Forex
If your open position is profitable, your equity will grow, giving you an additional free margin. And you can also add money to your trading account.
What is a good level of free margin in forex?
Above 100% is thought beneficial. If your trading account decreases below that level, you add your money to your deposit account.
What is the margin level in forex?
The margin level is a percentage of the margin available to maintain open positions. It indicates the level of risk in a trader’s account. Forex brokers monitor the traders’ margin level to find out whether the trader has enough amount to open a trade or not.
The margin level is calculated by dividing a trader’s equity by his used margin and multiplying it by 100.
What is Margin call?
When the margin level of a trader falls below a certain level, he receives a call from a broker. This call is known as a margin call.
In a margin call, the forex broker requests additional funds. The broker may ask to close out positions to prevent the account from going into a negative balance. It is important for a trader to maintain his margin and avoid these calls.
How to calculate Margin Level with an example
Let’s say that your equity is 15000 and your margin is 500, so your margin level is calculated through the following formula.
Margin level= equity divided by margin and the result multiplied by 100
(15000/500) x 100 =300%
Conclusion
You have now understood what is free margin in forex and its utility in trading. However, remember free margin is a complex concept. A trader can place a trade in future only if he has a free balance in his account.
If a free margin of a trader falls very low, he may receive a margin call from the forex broker. In order to avoid these calls, it is important to maintain a free margin in your account.
Free margin plays a significant role in risk management, and therefore a trader needs to monitor the margin level in his account to avoid a negative balance.
Hello exceⲣtionaⅼ blog! Does runnіng a bⅼ᧐g
such as this ｒequirе a massive amount work?
Ι һave absoluteⅼy no understanding of programming but Ι hɑd been hoping to start my own blog soon. Anyhⲟԝ, if you have any suggestions or tips for new blog owners рlease share.
I know tһis is off toрpic nevеrtheless I just haⅾ to ask.
Apprеϲiate it!
Have a look at my blolց post Efren
Nice blog here! Also your site loads up very fast! What
host are you using? Can I get your affiliate link to your host?
I wish my website loaded up as quickly as yours lol