Key Takeaways
- Free margin (available margin) is the capital you can use to open new positions: Free Margin = Equity − Used Margin.
- Learn the margin level formula and watch margin tiers — they determine when brokers trigger margin call and stop-out procedures.
- The leverage and free margin relationship gives buying power but also accelerates risk: know what happens to free margin when using leverage.
- Use a clear position sizing formula and a margin calculator to answer: how much free margin do I need for X position size?
Understanding Free Margin
In plain terms, free margin forex is the money in your trading account that is not currently locked up in margin for your open trades. It is the capital available to open additional positions or absorb floating losses.
Key components every trader must master:
- Equity vs used margin — know the difference: equity = account balance + unrealized P&L, while used margin is the amount currently held by the broker to maintain open positions.
- Free margin = equity − used margin.
- Brokers show a margin level formula (Equity / Used Margin × 100%) so you can track buffers.
Example: account balance $4,000; open trades show unrealized P&L of −$200, so equity = $3,800. If used margin = $1,000, then free margin = $2,800. That $2,800 is your available margin calculation to open more positions.
How Free Margin Is Calculated (Step-by-Step)
How to calculate free margin in forex is straightforward but essential to get right.
- Read your platform’s display: Balance, Equity, Used Margin (sometimes labelled “Margin”), Free Margin.
- Use the formula:
Free Margin = Equity − Used Margin Equity = Balance + Unrealized P&L
- To model potential trades, compute margin requirements per lot / contract size, then subtract that used margin from equity to estimate your free margin after opening the trade.
Free margin example EUR/USD at 100:1 leverage (expanded):
- Balance: $2,500; no unrealized P&L.
- Open 1 standard lot EUR/USD (100,000 EUR). Price = 1.1500. Contract value = 100,000 × 1.1500 = $115,000.
- Margin requirement at 100:1 = $115,000 ÷ 100 = $1,150.
- Free margin = $2,500 − $1,150 = $1,350.
If the pair moves unfavorably by 100 pips ($10/pip for 1 lot → $1,000 loss), equity becomes $1,500 and free margin falls to $350 — approaching risky levels.
This example demonstrates what happens to free margin when using leverage: large nominal exposure for small cash; consequently, small price moves can significantly change free margin and trigger margin events.
Free Margin, Leverage and Buying Power
The leverage and free margin relationship is often misunderstood. Leverage multiplies buying power (how much market exposure you can control), but it does not change the capital you actually own — it changes the required margin per lot.
Approximate buying power formula (use calculator for precision):
Buying Power ≈ Free Margin × Leverage
That approximation helps you see scale: $1,000 free margin at 100:1 gives potential exposure near $100,000. But this ignores instrument specifics — margin requirements per lot / contract size vary across pairs and brokers.
A cautionary note: higher leverage increases exposure but leaves a smaller cushion. Always compute the position sizing formula so you know the pip risk you can sustain before equity drops into the margin tiers where margin calls or stop-outs occur.
Position Sizing Using Free Margin
How free margin affects position sizing is the central operational question for every trader.
A robust position sizing routine:
- Choose risk per trade as a percentage of equity (e.g., 1%).
- Determine stop-loss in pips.
- Use pip value and desired dollar risk to compute lots: Lot Size = Dollar Risk / (Stop Loss (pips) × Pip Value)
- Confirm that required margin for that lot size fits within free margin.
Worked example (detailed):
- Equity: $10,000 (includes unrealized P&L).
- Risk per trade: 1% → $100.
- Stop-loss: 40 pips.
- Pip value (EUR/USD, 1 standard lot) ≈ $10/pip.
- Lot Size = $100 ÷ (40 × $10) = 0.025 standard lots (2,500 units).
- Required margin per standard lot at 50:1 = contract value ÷ 50; adjust for 0.025 lots. Suppose margin per 1 lot = $2,300 → margin for 0.025 lots = $57.50. Verify free margin exceeds that and retains buffer.
Now imagine you’re running several positions: the aggregation of used margin across trades reduces free margin. That’s why buying power, used margin, unrealized P&L and the margin close-out rule must be monitored constantly.
Margin Calls, Margin Levels and Stop-Outs
Brokers use margin level formula to determine health:
Margin Level (%) = (Equity / Used Margin) × 100
Common margin tiers:
- Warning level (e.g., 100–120%): broker warns you.
- Close-out (stop-out) level (e.g., 50%): broker begins auto-closing positions.
Does free margin affect margin calls and stop-outs? Yes. Falling free margin reduces margin level. If equity drops due to unrealized losses, free margin goes down and your margin level may hit the broker’s threshold — triggering margin call and finally stop-out.
Mitigations:
- Maintain a buffer (many pros keep margin level > 400% for active trading).
- Use smaller lot sizes or lower leverage to reduce the chance of quick equity erosion.
- Know your broker’s initial margin and maintenance margin policies and margin close-out rule.
How Market Conditions Change Free Margin
Market volatility, slippage, and gaps are real-world threats to free margin.
- During high volatility, brokers may increase margin requirements (higher margin tiers), immediately increasing used margin and reducing free margin.
- News events may cause gaps; a stop-loss becomes a market order and can fill at a worse level (slippage), producing larger-than-expected unrealized losses and lower equity.
Best practices:
- Use ATR-based stop sizing to adapt stops to volatility.
- Avoid holding highly leveraged positions through major macro events.
- Run scenario stress-tests with your margin calculator: simulate 50–100 pip moves and observe free margin trajectories.
Platform Tools and Margin Calculators
A reliable margin calculator is indispensable. Most broker platforms (MT4/MT5/OANDA/etc.) show real-time metrics and include calculators for margin per lot, pip values and buying power.
What a good calculator shows:
- Required margin per lot / contract size at current price and selected leverage.
- Estimated free margin after opening trade.
- Impact of unrealized P&L on equity and margin level.
- Quick answers to “how much free margin do I need for X position size”.
Pro tip: build a simple spreadsheet with columns for instrument, lot size, price, contract size, margin requirement, used margin, equity, and free margin — it’s a practical free margin trading dashboard.
Common Mistakes Traders Make With Free Margin
- Over-leveraging on small free margin balances — risking margin call with small moves.
- Ignoring unrealized P&L — forgetting that floating losses immediately reduce equity.
- Misreading broker specs (different contract sizes, base currencies, or netting rules).
- Failing to account for margin tiers and stop-out rules — leading to forced liquidations.
Avoid these by testing in demo, using conservative leverage, and validating calculations with a margin calculator every time you change size.
Advanced Tactics: Hedging, Scaling and Portfolio-Level Sizing
At portfolio level, treat free margin strategically:
- Hedging to release free margin: opening a hedge can reduce net exposure and sometimes reduce used margin depending on broker netting rules — freeing capital for other trades. Use carefully: some brokers treat hedged positions as separate, so check specs.
- Scaling in: start with a partial position to use less used margin initially, add size only when the trade confirms — this keeps more free margin available for adjustments.
- Aggregate sizing across correlated positions: monitor total used margin, not just per-trade, to prevent accidental over-exposure.
Quick Reference: Free Margin Cheat Sheet
- Free Margin = Equity − Used Margin.
- Margin Level Formula = (Equity ÷ Used Margin) × 100%.
- Initial Margin = margin required to open a trade.
- Maintenance Margin = threshold to keep trade open.
- Buying Power ≈ Free Margin × Leverage (approx).
- Use a margin calculator to compute exact margin requirements per lot / contract size.
Bottom Line — Practical Rules to Protect Your Free Margin
- Use conservative leverage; test the leverage and free margin relationship on demo accounts.
- Always compute how to calculate free margin in forex for any planned trade and confirm via a margin calculator.
- Convert pip risk into dollar risk and apply a strict position sizing formula.
- Maintain a free margin buffer to avoid margin call and stop-out surprises.
- Know your broker’s margin tiers, margin close-out rule, and netting/hedging policies.
FAQ
Q: How do I calculate free margin in forex?
A: Free Margin = Equity − Used Margin. Equity = Balance + Unrealized P&L. Use your platform’s display or a margin calculator to compute required margin per lot and estimate free margin after opening any trade.
Q: What happens to free margin when using leverage?
A: Higher leverage reduces required margin per lot and increases buying power, but it amplifies P&L swings — adverse moves reduce equity and free margin faster, heightening the risk of margin calls and stop-outs.
Q: How much free margin do I need for X position size?
A: Compute required margin (contract size × price ÷ leverage) for that position. Ensure free margin exceeds required margin plus a buffer. A margin calculator or spreadsheet simplifies this.
Q: Does free margin affect margin calls and stop-outs?
A: Yes. Lower free margin reduces margin level; when margin level breaches broker thresholds (margin tiers), margin calls and stop-outs occur to protect the broker and the trader’s account.