What is Free Margin in Forex?
If you are not a beginner in forex trading, then you probably are familiar with the term “margin” as it is mentioned often in forex trading every now and then. But if you are a starter that "what is equity in forex" and "margin level forex", then it is surely a completely new concept for you. So, whether you are an expert or a newcomer, either way you have to master on this term if you want to make money and become successful in forex trading. Without the proper knowledge of margin, you can’t become successful in forex trading. Therefore, we come up with this article to make you understand all the ins and outs of what is free margin in forex market.
What is Margin in Forex?
Before answering the question of “what is free margin in forex” we must learn about margin in forex. Margin is basically the security or collateral which a trader needs to deposit in their broker house so that it can cover a portion of the capital risk which the trader makes by trading for the broker.The gaps or portion of an open trading are expressed in writing as a percentage number. It is better for you if you think a margin as the deposit of your all trades.
It is the margin that decides the maximum amount of leverage you can use in your account. Margin is usually required by the best forex broker for your trading account. Therefore, “trading on margin” means trading with leverage.
Margin and Free Margin in Forex
Every broker requires different margin and it is very important to understand all about margin before choosing any broker and starting your journey on “trading on margin”.
But trading on margin has different sorts of consequences as well. For more information you can also read forex education one of the best forex broker reviews sites. It can certainly influence the trading results or outcome which can be positive or negative and there will be a chance of potential profits and losses as they will be seriously magnified.
Let’s have a clear idea with an example. Suppose, a broker is offering a leverage of 1:25 for trading in forex. This offered leverage means that for each 25 units of currency in any open position, only 1 unit of currency will be required as the margin. If we put this in dollar calculation, if the amount of your interested open position was $25, the margin would be an amount of only $1. So, according to this example, the margin will be equivalent to 1/25 or 4%.
What is Free Margin in Forex?
As you are now well-acknowledged of “what does margin mean”, how it should be calculated, and it’s relation with leverage, therefore, it will be easy for you to understand what is free margin in forex. Forex education is the right platfrom to know about this. Free margin is that specific amount of money in a trading account which is available for using to open trading in new positions. Calculation system of free margin is quite easy as it can be calculated by following this theory: (Account Equity – Used Margin)
A question should arise on your mind “what is the equity in forex?” We will discuss on what is equity in forex in our next point. Now, the application of the above-mentioned theory of calculating free margin mainly deals with the unrealized loss or profits from the open positions in equity forex trading. Therefore, if you are currently holding any open position with profits, then you are free to use this profit to open new positions on your account as an additional margin.
We can have a better understanding on what is free margin in forex with an example. Suppose, you have a $2000 trading account with a margin of 5%. Now, you are willing to open a position worth of $10000. So, when you will open the trade, these will be the outcome:
Margin Level Forex
- Account Balance: $2000
- Margin: $500 (5% of $10000)
- Equity: $2000
- Free Margin: $1500 (Equity – Used Margin)
If your position value increases in the market by giving you an unrealized profit of $100, then the outcome will look like:
- Account Balance: $2000
- Margin: $500
- Equity: $2100
- Free Margin: $1600
Here, the amount of used margin and account balance didn’t change but the amount of free margin and the equity both increased to show the unrealized profits of the open trading position. You should also know that, if the value of the position had decreased by the same amount, then the amount of equity and free margin will also be decreased in the same manner.
What is Equity in Forex?
As we have previously mentioned about equity, here we are giving you a complete insight of what is equity in forex? Equity is the total amount of the trading account balance with the amount of unrealized profit or loss from any open position. When the discussion of the account balance will be on the table, we have to talk about the total deposited money of the trading account. This sum will also include the used margin for an open position. If there is no trades open for you in the trading market, then the equity will be equivalent to the balance of trading account. If you want to make some profits in forex trading, then you should be well-acknowledged of what does equity mean in forex.
What Does Margin Level Mean?
Margin level forex is a very important concept of understanding trading. It illustrates the ratio of equity and used margin in a trading. The result will be shown as a forex margin level percentage number and it should be calculated like this: Margin Level Forex: (Equity/ Used Margin)*100
Forex brokers have to use margin level forex to determine whether a forex trader can take any new position in the market or not. If your trading account margin level is at 0%, then it will be considered that your trading account has no open position in the forex market.
If you possess a margin level forex of 100%, then it will reflect that equity of the account will be the same as the used margin. It also means that the broker won’t allow any more trades on that account. But the scenario can change, if you add some extra cash to your trading account or the unrealized profits of your account increase somehow. Hope you get the complete picture of what is free margin level in forex from this discussion.
How to Calculate Margin Level Percentage?
Let’s make things clear with an example. Suppose that, you own a trading account with a balance of $20000. In order to opening a position in this account, you will require a margin of $2000. But in case the market goes against you and results in an unrealized loss of $18000, then your equity will be $2000 ($20000 - $18000). Here, we can see that, the equity is equal to the margin which means that your forex margin level percentage in this scenario is 100%. For more information, you can also visit forex broker reviews where you get all current updates about the margin level.
Therefore, you won’t be no longer able to open any new position on your trading account. But if the market turns around and your equity amount increases again, or you put some more cash money into your trading account, then you will be able to open a new position on your account. This is the way of how to calculate margin level percentage in forex.
Difference Between Margin and Leverage in Forex?
As a forex trader, you need to understand a pretty important concept of forex trading which is the difference between margin and leverage in forex. Leverage and forex margin are correlated in many aspects of forex trading even though they have different meanings.
We have already provided you the full insight of forex margin and make you understand what a forex margin is. It is the deposit money which is required to place any trade in the forex market to keep a position open. Whereas, leverage, on the contrary, means enabling the traders to trade for larger position by outlaying a smaller capital.
A leverage ratio of 25:1 means that the trader has the ability to control a trade worth 25 times their starting investment. Therefore, if a trader has $1000 available to open a trade in the market, then he can easily control a position worth of $25000 if the leverage ratio remains same like 25:1.
Forex Margin Level Percentage
In forex trading market, leverage is basically related to margin value which indicates the trader what amount of forex margin level percentage of the total trade sum is required to open that certain trade. Therefore, if the forex margin is 4%, then the available leverage for the broker will be 25:1. If the forex margin is measured 5%, then the available leverage for the broker will be 20:1. And a forex margin of 10% is equivalent to a leverage of 10:1. This is the whole formula of the relation between the margin and the leverage.
In the forex market, pips (percentage in points) is used for determining the currency movements. A pip is the smallest movement which a currency can make in the forex market. For almost all major currency pairs, such as GBP/USD, a pip is basically the price movement of 0.0001. Now, if GBP/USD moves from 1.4100 to 1.4200, this will be a movement of 100 pips in currency. And it is basically just a one cent move as per the forex exchange value. Here, you can see that a one cent move isn’t something that sound like much. But when you will use the leverage in trading, this one cent move will earn you a lot of profits.
Difference Between Margin and Leverage in Forex
This is why leverage is considered one of the important tools of forex trading. Because it gives the opportunity to the small price movements so that they can be transformed into a larger profits. However, it has the same opposite reaction as well. It can bring you larger losses at the same time if things go different ways in the market. Therefore, the leverage must be properly managed like the experts. Excessive use of the leverage can increase the risk and that’s why you should always use it with proper caution.
Leverage in forex trading is a feature which is used for derivative trading, for example as forex spread betting and contracts which is used for different trading. Leverage can also play a vital role in taking positions across a wide range of asset classes other than the forex currencies. It includes indices, commodities, and stocks as well. These are all about the difference between margin and leverage in forex.
What Does Margin Level Mean?
If you are dealing with leveraged forex trading, margin is the most important concept you need to understand on the first place. Margin is the amount of money which a trader requires to take forward to place a trade in the market and maintain the open position there. Though people think margin is a transaction cost, but it is not. It is rather a security deposit which the broker holds during an open trade to cover the potential loss of the broker.
Traders usually increase their exposure by trading currencies on margin. Margin also allows the traders to open trading positions which are leveraged. It can manage the larger trades with a smaller amount of capital in the market.
What is Free Margin Level in Forex ?
Margin level means that specific amount of money which a trader left available on his account to open further positions in the market. When the margin level drops to 100%, all available margin will be in use and the trader won’t be allowed to open new trades. But if the margin level falls below 100%, the amount won’t be enough to cover that certain margin required to keep any position open at the forex market. When this type of scenario will come, a term called “margin call” will happen and the broker has to close a few positions of the traders. But if the margin call does not meet all the requirements to bring the equity, then the trading account won’t be back up to the previous minimum value.
"Its' very difficult to be different from the rest of the crowd the majority pf the time, which by definition is what you're a sucessful trader" quoted by Bill Lipschutz @BillLipschutz one of the forex traders over the world.
Trading on margin in forex is a popular strategy which is currently used by millions of traders all over the world. Here are the top 10 forex brokers in the world. This is because of using the leverage which is subsequently used for taking larger positions to make profits. However, the losses will be magnified the same way as the profits by trading on margin. You should be well-aware of the fact as well.
Margin and Free Margin in Forex
It would be better for the traders to spend some time understanding how the margin works in the forex trading. It should be done before doing any trading using the leverage in different forex market. It is very important to understand all the concepts such as margin, free margin, margin level, margin calls, etc.
One thing should always be on a trader’s mind that they need to be well-aware about their forex positions so that it could be liquidated if somehow the margin level falls below the required minimum level.
Margin and free margin in forex are two of the hot topics on which debates are going all over the forex market every now and then. Traders and brokers has different opinions and theories on margins. Some traders say that too much margin is not good for the traders. In fact, they argue that, it is quite dangerous and it is easy to see why they are arguing on this. However, individual trading style as well as experience in trading play an important role in trading with too much margin.
Trading on margin is a profitable forex strategy for both the new and veteran forex traders. But you should also know that you must be aware of the associated risks of trading on margin. In order to utilizing forex margin, you must ensure the complete understanding of your whole account operation process. Make sure that you go through the whole agreement paper with proper understanding before signing it. Do select your broker carefully and if anything of the paper you don’t understand, ask your broker immediately to make that clear. Never sign the paper without the proper knowledge about the whole of it. There should be no doubts on “what is free margin in forex” after finishing this article.
Leave a Comment