In the previous lesson, we understood one of the classes of Margin – Used Margin. There is another class, which is, the Free Margin. And in this lesson, we shall be discussing this concept.
Prerequisite Definitions
Used Margin – It is the sum of Required Margin from all the open positions.
Free Margin – It is the representation of the current value of a trading account. Mathematically, it is the algebraic sum of the Account Balance and the Floating P/L.
What is Free Margin?
Free Margin is simply the difference between Equity and Used Margin.
Simple, it is the complement of Used Margin. If Used Margin represents the value which is locked up which cannot be used to place a trade, Free Margin, on the other hand, determines the amount that can be utilised to take new positions.
Free Margin is also known by the terms Available Margin, Usable Margin, and Usable Maintenance Margin.
How to Calculate Free Margin
As mentioned, Free Margin is the arithmetic difference between Equity and Used Margin. So,
Free Margin = Equity – Used Margin
Note that, if you have any positions open, the Free Margin increases or decreases depending on how your trade is performing.
Equity is calculated using Floating P/L, which changes with every tick. So, as the Floating profits increases, the Equity increases, this, in turn, increases the Free Margin as well.
Similarly, Floating Loss decreases Equity value, which reduces the Free Margin.
Understanding Free Margin with Examples
There are two simple steps involved in the calculation of Free Margin:
- Equity
- Used Margin
In the below examples, let us consider that you have deposited $1,000 in your account. So, the Account Balance will be equal to $1,000.
There are two cases we can consider to calculate the Free Margin – When there are no positions open and when there are positions open.
Case 1: When no positions are open
Equity
Since there are no open positions, the equity would be same the Account Balance.
Equity = Account Balance + Floating P/L
Equity = $1,000 + 0
Hence, Equity turns out to be equal to the Account Balance itself.
Used Margin
Again, since there no trades open, there is no Used Margin as well.
Free Margin
Free Margin = Equity + Used Margin
Applying the above parameters in the below expression,
Free Margin = $1,000 + 0
Hence, from this, we can conclude that the Free Margin will be same as the Balance and Equity.
Case 2: When there are positions open
Let’s say you went long 10,000 units on USD/CAD. Also, let’s say that the Required Margin is $200.
Equity
Assuming that you are running in a profit of $50, the Equity can be calculated as,
Equity = Account Balance + Floating P/L
= $1,000 + $50
Equity = $1,050
Used Margin
Since there is only one position, the Used Margin will be same as the Required Margin.
Hence, the Used Margin will be equal to $200.
Free Margin
Free Margin = Equity – Used Margin
= $1,050 – $200
= $850
Thus, the Free Margin available to you will be $850.
And hence, this completes the lesson on Free Margin. In the subsequent lesson, we shall be discussing more detailed margin concepts like Margin Level, Margin Call Level, and Stop Out Level.
