What is Free Margin?

In its simplest definition, Free Margin is the money in a trading account that is available for trading. To calculate Free Margin, you must subtract the margin of your open positions from your Equity

Free Margin can be thought of as two things:

  1. The amount available to open NEW positions.
  2. The amount that EXISTING positions can move against you before you receive a Margin Call or Stop Out.
  3. How to Calculate Free Margin
Free Margin = Equity - Used Margin
  • Floating profits increase Equity, which increases Free Margin. 
  • Floating losses decrease Equity, which decreases Free Margin. 

Example: No Open Positions

Step 1: Calculate Equity

Equity = Account Balance + Floating Profits (or Losses)

$1,000 = $1,000 + $0

The Equity would be the SAME as your Balance.

Since you don’t have any open positions, you don’t have any floating profits or losses.

Step 2: Calculate Free Margin

Free Margin = Equity - Used Margin

$1,000 = $1,000 - $0

Since you don’t have any open positions, there is no margin being “used”.

This means that your Free Margin will be the same as your Balance and Equity.

Example: Open a Long USD/JPY Position

Step 1: Calculate Required Margin

You want to go long USD/JPY and want to open 1 mini lot (10,000 units) position. The Margin Requirement is 4%.

How much margin (Required Margin) will you need to open the position?

Since USD is the base currency. this mini lot is 10,000 dollars, which means the position’s Notional Value is $10,000.

Required Margin = Notional Value x Margin Requirement

$400 = $10,000 x .04

Assuming your trading account is denominated in USD, since the Margin Requirement is 4%, the Required Margin will be $400.

Step 2: Calculate Used Margin

Aside from the trade we just entered, there aren’t any other trades open.

Since we just have a SINGLE position open, the Used Margin will be the same as Required Margin.

Step 3: Calculate Equity

This means that your floating P/L is $0.

Let’s calculate your Equity:

Equity = Account Balance + Floating Profits (or Losses)

$1,000 = $1,000 + $0

Step 4: Calculate Free Margin

Free Margin = Equity - Used Margin

$600 = $1,000 - $400

As you can see, another way to look at Equity is that is the sum of your Used and Free margin.

Equity = Used Margin + Free Margin

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