You may have heard of the term free margin in forex before, or you may be a beginner and completely alien to this term. In any case, this is an important topic that you need to know in order to become a good foreign exchange trader. This article will show you what is free margin in forex? how much free money you have when trading currencies, how to measure it, how to compare to leverage, and much more.
What is margin in forex?
When you trade Forex, you only need a small amount of capital to open and maintain new positions. This capital is called the margin. Margin is not a commission or a transaction amount. It could be some of your money that the Forex broker blocks in your account to keep your trades open and so you can offset future losses. Brokers use or freeze this portion of their assets during certain transactions. The margin required by your foreign exchange broker will determine the maximum change you can apply to your trading account. Therefore, margin trading is also called trading with leverage.
What does free margin mean?
There are two types of fields of margins, used and free margins. The total margin of all open positions is added up to get the used margin. The difference between equity and used margin is the available margin. In other words, the free margin is the amount of money in the trading account used to open new positions.
Equity is the sum of the amount in your account and the open profit and loss for all open positions. When we talk about account balances, we mean the total amount invested in the current account. If there are no open positions, the capital will be equal to the balance on the current account.
How to calculate free margin?
Free margin is calculated by following formulae:
Free margin = equity – used margin
If you already have a profitable open position, your capital will increase, which means your free margin will increase. If you have an open non-profit organization, your capital will decrease, which means that your available funds will decrease.
Advantages of free margin
The advantage of margin trading is that you can make the most of your account balance. For example, your account balance might be $ 1,000 and there are very few features.
You will start a $ 1000 trade and earn 100 points, each worth 10 cents for each $ 1000 trade. Your business gets $ 10 or 1% of the profits. If you use the same $ 1000 for a 50: 1 margin trade and the trade value is $ 50,000, 100 points will bring you $ 500 or 50% profit.
Disadvantages of free margin
One of the downsides to using margin is risk. You are already using your $ 1000 account balance. If you trade with a 10: 1 spread of $ 50,000, a loss of 100 pips is $ 500, which is 50% of the share price. If bad fortune comes to you again in this kind of a transaction, it will be a huge loss.