Free margin is a simple-looking number that quietly controls what you can do next in a leveraged forex account. Traders see it every day on their platform, but understanding what it represents, how it moves, and how to manage it is essential for avoiding forced losses. This article explains free margin in plain language, walks through concrete examples, and highlights the practical steps traders use to protect their accounts. Trading carries risk; this is general information and not personalised advice.
The building blocks: balance, equity and used margin
To understand free margin you first need three account terms that most platforms display together. Your account balance is the cash you have after closing trades. Equity is your balance plus or minus any unrealised profit or loss from open positions — it is the live value of your account. Used margin (sometimes called required margin) is the portion of your equity that the broker locks up to keep your open positions funded.
Imagine you start with $3,000 in the account and haven’t opened any trades. Balance and equity are both $3,000 and used margin is $0. If you open trades the broker will calculate how much margin those trades require and mark that amount as used margin. Equity then changes with market moves; used margin generally only changes when you open or close positions, unless the broker recalculates ongoing margin requirements.
Free margin: the definition and simple formula
Free margin is the portion of your equity that is not tied up in used margin — in other words, the money left over that you can use to open new trades or absorb further losses. You can think of it as the account’s available buying power or buffer.
The relationship can be written as a short sentence rather than a formula box: free margin equals equity minus used margin. If equity falls because a trade goes against you, free margin falls too. If a trade becomes profitable, equity rises and free margin increases.
A concrete example — watching free margin move
Suppose you deposit $2,000 and open a position that requires $600 margin. At that moment, equity is still $2,000 (assuming no floating P/L) and used margin is $600, so free margin is $1,400. If the market moves in your favour and your open position shows an unrealised profit of $200, equity becomes $2,200 and free margin rises to $1,600. Conversely, if the trade goes against you by $300, equity becomes $1,700 and free margin drops to $1,100.
This dynamic explains why free margin is useful: it shows how much room you have to open new positions or withstand adverse moves before your broker intervenes.
How leverage and position size affect free margin
Leverage lets you control a large position with a small deposit. That deposit is the margin. Higher leverage reduces the margin required for a given position and therefore, for the same equity, lets you open larger positions — but it also reduces the cushion: a small price move can quickly eat into free margin.
For example, with 100:1 leverage a standard lot (100,000 units) in EUR/USD at a price of 1.2000 has a notional value of $120,000 and would require roughly $1,200 margin (120,000 ÷ 100). If your account equity is $5,000 and you use $1,200 margin, your free margin after opening that trade is $3,800. If you instead used lower leverage, the margin would be higher and free margin lower for the same position size. Choosing position size and leverage is therefore a direct decision about how much free margin you leave as buffer.
Margin level, margin call and stop-out — the practical consequences
Platforms usually display a margin level percentage: this is equity divided by used margin, multiplied by 100. A margin level above 100% means equity exceeds the margin locked in; a margin level of 100% means equity equals used margin and free margin is zero. Brokers set trigger thresholds — a margin call level and a stop-out level — at which they warn you or start closing positions to prevent your account from going negative.
These thresholds vary between brokers. When free margin is low, the margin level is low and you are closer to a margin call or forced liquidation. If free margin reaches zero, you typically cannot open new trades; if the situation worsens past the broker’s stop-out threshold, the platform will start closing positions (usually the largest losers first) to restore margin.
Common situations traders run into
Traders often experience one of two typical scenarios. The first is over-leveraging: opening positions so large that a normal market swing rapidly reduces equity and eliminates free margin. The second is holding positions through volatile events (news, openings/gaps) where losses increase suddenly and push equity below required levels before you can respond. Both scenarios end the same way if unchecked: reduced free margin, margin call, and possible forced closures.
Practical steps to manage free margin
Managing free margin is part of everyday risk management. Before opening a trade, estimate the margin the broker will require for that instrument and compare it to current equity so you know the resulting free margin. Keep position sizes consistent with the amount of free margin you want to reserve. Use stop-loss orders to limit losses and avoid holding excessively large positions into times of high volatility. If you’re running multiple positions, consider how their combined margin affects free margin rather than treating each trade separately.
If free margin begins to run low you have a few practical options: reduce position size on new trades, close some existing positions to release margin, add funds to increase equity, or hedge positions where appropriate. Each choice has trade-offs; closing a position locks in a loss or profit, while adding funds changes your exposure.
Caveats and risks traders should know
Free margin is a live number and can change quickly, especially in markets with high leverage. Platform displays, margin rules and stop-out procedures differ from broker to broker, so you should check the exact mechanics with your provider rather than assuming a single standard. Currency conversion can also affect margin and equity if your account base currency differs from the traded currency; margins are usually converted using current exchange rates.
Sleep-time gaps, sudden political or economic announcements, and thin liquidity can all create moves that outpace your ability to react, meaning a margin call or stop-out may occur without prior notice. Demo accounts can be useful to learn the mechanics, but execution conditions and slippage can differ in live trading. Finally, while margin lets you amplify returns, it also amplifies losses — it is possible to lose all deposited funds, and in some cases you may be exposed to further liabilities depending on the account and provider.
Key Takeaways
- Free margin = equity − used margin; it shows how much of your account is available to open new positions or absorb losses.
- Free margin rises with unrealised profits and falls with unrealised losses and with larger or additional positions.
- Leverage and position size strongly influence how quickly free margin can be depleted; higher leverage means a smaller buffer.
- Monitor margin level and know your broker’s margin call and stop-out rules; use position sizing and stop-losses to protect free margin.
References
- https://www.equiti.com/sc-en/news/trading-ideas/margin-levels-in-forex-trading-what-traders-should-know/
- https://alpari.com/en/help/markets-and-trading/trading-education/what-is-free-margin-and-margin-level/
- https://www.tier1fx.com/faq/what-is-the-difference-between-margin-free-margin-and-margin-level/
- https://www.babypips.com/learn/forex/what-is-free-margin
- https://www.forex.com/en-us/about-us/financial-transparency/trade-margins/
- https://www.sofi.com/learn/content/free-margins/
- https://volity.io/forex/free-margin/
- https://b2prime.com/news/what-is-free-margin-in-fx-trading