What is Free Margin in Forex? Beginners Case Study

What is free margin in forex? So many traders found it difficult to understand what free Margin is! Margin is the amount of money that you have to put down as collateral to cover your position. If you are trading on margin and have an open position, you can’t simply close it out.

You must first reduce the amount of margin that was used to open the position by paying down or covering some or all of it. Once this happens, you will be able to close out your position and take whatever profits or losses you may have made so far.

When calculating how much free margin you have in your account, traders add up their total account balance and subtract from it any outstanding positions that they hold.

So if you have $100 in your account and currently have one open position worth $50, then your free margin is $50 because the total value of your open positions does not exceed your total account balance. Free Margin is also referred to as “free funds” or “available funds.”

What is free margin in forex?

Free margin in Forex is defined as a long option account which is left unsold by the trader for an immediate payout. Free margin is defined as the amount left unsold when a long option account (such as a currency pair) has an intended bid price of zero.

Read more article: How to do Forex Trading in Kenya?

How is free margin calculated?

Free margin is determined by first calculating the leverage of the trade. Then, the amount left unsold is calculated as the amount of leverage used for that position.

How to use free margin in forex trading?

Free margin is most often used for trading currency pairs, such as USD-USD. The transaction costs for trading currency pairs like USD-GBP, USD-Euro, USD-Australian are usually low.

Forex clients may take advantage of free margin when trading either currencies or financial instruments which can be traded in pairs.

For example, if a client wants to buy a long exposure to USD for three months and earns $25 per month on that trade, then the transaction costs for that trade are $600. Thus, a client will be able to earn $25 per month on a USD trade that is done for a long time.

Read more article: Best Forex Pairs to Trade for Beginners

How to setup a forex trading account?

Setting up a Forex trading account is similar to setting up any other financial account. There are two ways to set up a Forex trading account. One way is to set up an account directly with Forex brokers like CMC Markets.

Another way is to open an account with an online broker which provides free trading accounts. The minimum deposit requirement for an online broker is $5,000.

A client can set up the account online without having to wait for a deposit or to fill out any kind of application form. If a client has questions about how to set up a Forex trading account, they should contact an online broker for help.

Forex trading is free margin trading.
The advantages of free margin trading.
Significantly lower transaction fees.
Decrease in commissions.
Higher margin requirements.
Keep trading accounts longer.

Free trading is a very lucrative option for many people. A client can continue to make money while trading both currencies and financial instruments. The margin requirements are quite low.

The minimum margin requirement for USD is 1.5% or 4.5% depending on the number of currencies being traded. So, even if a client makes no profits in the trade, the capital of the trade is still used up.

However, if a client trades currencies like EUR and makes a profit on a trade that requires $1,000 of free margin to close the trade, the capital of the trade is still used up and the trading account will be closed by the trader.

Read more article: Can Forex Trading Make You a Millionaire?

Bottom line

We’ll close this article by discussing how you can actually make use of your Free Margin to buy and sell currencies with greater advantage. Here’s a quick example: let’s say that you have $100,000 in your Forex account and $50,000 in “Free Margin.”

While it seems like you have plenty of room to maneuver and make profitable trades, if you try to take out a trade for $40,000 of currency, you will actually only be able to trade $30,000 of it because your broker only allows you to trade up to 90% of your Free Margin.

But what if instead you took out a trade for $30,000 and then traded the remaining $10,000 separately? Your Free Margin would still be intact while the rest of your balance could be used as you wished.

Ultimately, the answer to, “What exactly is free margin?” is: it all depends. Free margin can increase your trading capacity, but only if you use it wisely. Otherwise, free margin comes with a downside, namely: risk.

Only you can decide whether or not the risk outweighs the reward in your situation, but at least now you have some better tools to help inform that decision.

Free margin is a positive number that represents the amount of margin a trader has available to trade with. Margin is what is used to trade forex and is based on the requirement that the trader must post a percentage of the total trade value.

The other part of the equation is that margin must be traded before the broker will allow you to open a position, thus this free margin is always added to the account before trading.

Due to market volatility, and thus price fluctuation, trading using leverage can also affect Free Margin when trading CFDs or Copy Trading.

Read more article: Forex Courses for Beginners

Need Forex Trend Scanner? Click Here!