What is Free Margin in Forex Trading?

Free Margin is the amount of equity in a forex trading account that is NOT being used as margin for existing open trades. It determines how much capital is available to open new positions or sustain floating losses before receiving a margin call.

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How is Free Margin Calculated?

👉 Formula:
🔹 Free Margin = Equity – Used Margin
🔹 Equity = Account Balance + Floating P/L

📌 Key Takeaways:
✔️ Higher floating profits = More Free Margin
✔️ Higher floating losses = Less Free Margin
✔️ No open trades = Free Margin = Equity

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Example 1: No Open Trades

🔹 You deposit $1,000 in your account but have no open trades.

✔️ Equity = $1,000
✔️ Used Margin = $0
✔️ Free Margin = $1,000 – $0 = $1,000

📌 With no open trades, Free Margin is the same as your Balance & Equity.

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Example 2: Open a USD/JPY Trade

🔹 You open a long USD/JPY position of 1 mini lot (10,000 units).
🔹 The Margin Requirement is 4%.

Step 1: Calculate Required Margin

🔸 Notional Value = $10,000
🔸 Required Margin = $10,000 x 4% = $400

Step 2: Calculate Used Margin

🔸 Used Margin = $400 (since only one trade is open).

Step 3: Calculate Equity

🔹 If the trade is at breakeven (Floating P/L = $0):

✔️ Equity = Balance + Floating P/L
✔️ $1,000 = $1,000 + $0

Step 4: Calculate Free Margin

✔️ Free Margin = Equity – Used Margin
✔️ $600 = $1,000 – $400

📌 Since $400 is locked as margin, only $600 is available for new trades.

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Why is Free Margin Important?

✅ Determines if you can open new trades – More free margin = more trading opportunities.
✅ Helps avoid margin calls – If Free Margin drops too low, the broker may liquidate trades.
✅ Indicates account health – A low Free Margin means high risk exposure.

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Final Thoughts

✔️ Monitor your Free Margin – If it gets too low, you risk a margin call.
✔️ Equity fluctuates with open trades, impacting Free Margin.
✔️ Keep a Free Margin buffer to avoid forced liquidation.

Now that you understand Free Margin, next, we’ll discuss Margin Level and why it’s crucial for risk management in forex trading! 🚀