On most financial trading platforms, you will see three types of margins:
- Free Margin
- Margin Level
Used Margin, which is just the aggregate of all the Required Margin from all open positions, was discussed in a previous lesson.
Free Margin is the difference between Equity and Used Margin.
In other words, Free Margin is the amount of money that is NOT being tied up in margin for current open positions.
Free Margin can be manifested as “Usable Margin” because these are the funds that are available to you for opening new positions. Therefore you can “use” this margin.
You can increase your free margin in your trading account by:
- You are depositing new funds
- Close open positions
- Profits on already open positions increase
Free Margin can be thought of as two things:
- The amount available to open NEW positions.
- The amount that EXISTING positions can move against you before you receive a Margin Call or Stop Out.
But we will stay on the winning case scenarios for the moment and will explain the bad ones later.
Free Margin is also known as Usable Margin, Usable Maintenance Margin, Available Margin, and “Available to Trade“.
How to Calculate Free Margin:
Let’s say we have a trading account with a balance of $1,000 and a margin of 5%. We want to open a position that has a cost of $8,000. At the point of opening the trade, the following is true:
Account Balance = $1,000
Margin = $400 (5% of $8,000)
Free Margin = $600 (Equity – Used Margin)
Equity = $1,000
If the value of our position increases, giving us an unrealised profit of $50, we can ascertain the following:
Account Balance = $1,000
Margin = $400
Free Margin = $650
Equity = $1,050
The used margin and account balance do not change, however, the free margin and the equity both increase to reflect the unrealised profit of the open position.
In conclusion, if you have open positions, and they are currently profitable, your Equity will increase, which means that you will have more Free Margin as well.
If it increases your Equity, it will increase your Free Margin, as well.
If your open positions are losing money, your Equity will decrease, which means that you will also have less Free Margin as well.
If you don’t have any open positions, then the Free Margin will be the SAME as the Equity.
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.
It can be concluded that Equity is the sum of your Used and Free margin.
Let’s learn more about the Margin Level!