## What is Free Margin?

What does “Free Margin” mean?

Margin can be classified as either “used” or “free”.

Used Margin, which is just the aggregate of all the Required Margin from all open positions, was discussed in a previous lesson.

Free Margin is the difference between Equity and Used Margin.

Free Margin refers to the Equity in a trader’s account that is NOT tied up in margin for current open positions.

Free Margin is also known as “Usable Margin” because it’s margin that you can “use”….it’s “usable”.

Free Margin can be thought of as two things:

1. The amount available to open NEW positions.
2. The amount that EXISTING positions can move against you before you receive a Margin Call or Stop Out.

Don’t worry about what a Margin Call and Stop Out are. They will be discussed later.

For now, just know they’re bad things. Like acne breakouts, you don’t want to experience them.

Free Margin is also known as Usable MarginUsable Maintenance MarginAvailable Margin, and “Available to Trade“.

## How to Calculate Free Margin

Here’s how to calculate Free Margin:

`Free Margin = Equity - Used Margin`

If you have open positions, and they are currently profitable, your Equity will increase, which means that you will have more Free Margin as well.

Floating profits increase Equity, which increases Free Margin.

If your open positions are losing money, your Equity will decrease, which means that you will also have less Free Margin as well.

Floating losses decrease Equity, which decreases Free Margin.

## Example: No Open Positions

You don’t have any open positions, what is your Free Margin?

### Step 1: Calculate Equity

If you don’t have any open position, calculating the Equity is easy.

```Equity = Account Balance + Floating Profits (or Losses)

\$1,000 = \$1,000 + \$0```

The Equity would be the SAME as your Balance.

Since you don’t have any open positions, you don’t have any floating profits or losses.

### Step 2: Calculate Free Margin

If you don’t have any open positions, then the Free Margin is the SAME as the Equity.

```Free Margin = Equity - Used Margin

\$1,000 = \$1,000 - \$0```

Since you don’t have any open positions, there is no margin being “used”.

This means that your Free Margin will be the same as your Balance and Equity.

## Example: Open a Long USD/JPY Position

Now let’s make it a bit more complicated by entering a trade!

Let’s say you have an account balance of \$1,000.

### Step 1: Calculate Required Margin

You want to go long USD/JPY and want to open 1 mini lot (10,000 units) position. The Margin Requirement is 4%.

How much margin (Required Margin) will you need to open the position?

Since USD is the base currency. this mini lot is 10,000 dollars, which means the position’s Notional Value is \$10,000.

```Required Margin = Notional Value x Margin Requirement

\$400 = \$10,000 x .04```

Assuming your trading account is denominated in USD, since the Margin Requirement is 4%, the Required Margin will be \$400.

### Step 2: Calculate Used Margin

Aside from the trade we just entered, there aren’t any other trades open.

Since we just have a SINGLE position open, the Used Margin will be the same as Required Margin.

### Step 3: Calculate Equity

Let’s assume that the price has moved slightly in your favor and your position is now trading at breakeven.

This means that your floating P/L is \$0.

```Equity = Account Balance + Floating Profits (or Losses)

\$1,000 = \$1,000 + \$0```

The Equity in your account is now \$1,000.

### Step 4: Calculate Free Margin

Now that we know the Equity, we can now calculate the Free Margin:

```Free Margin = Equity - Used Margin

\$600 = \$1,000 - \$400```

The Free Margin is \$600.

As you can see, another way to look at Equity is that is the sum of your Used and Free margin.

`Equity = Used Margin + Free Margin`

## Recap

In this lesson, we learned about the following:

• Free Margin is the money that is NOT “locked up” due to an open position and can be used to open new positions.
• When Free Margin is at zero or less,  additional positions cannot be opened.

In previous lessons, we learned:

• What is Margin Trading? Learn why it’s important to understand how your margin account works.
• What is Balance? Your account balance is the cash you have available in your trading account.
• What is Unrealized and Realized P/L? Know how profit or losses affect your account balance.
• What is Margin? Required Margin is the amount of money that is set aside and “locked up” when you open a position.
• What is Used Margin? Used Margin is the total amount of margin that’s currently “locked up” to maintain all open positions.
• What is Equity? Equity is your Balance plus the floating profit (or loss) of all your open positions.

Let’s move on and learn about the concept of Margin Level.

## What is Equity?

What does “Equity” mean?

The account equity or simply “Equity” represents the current value of your trading account.

Equity is the current value of the account and fluctuates with every tick when looking at your trading platform on your screen.

It is the sum of your account balance and all floating (unrealized) profits or losses associated with your open positions.

## How to Calculate Equity If You Have No Trades Open

If you do NOT have any open positions, then your Equity is the same as your Balance.

`Equity = Account Balance`

### Example: Account Equity When You Have No Open Trades

Since you haven’t opened any trades yet, your Balance and Equity is the same.

## How to Calculate Equity If You Have Trades Open

If you have open positions, your Equity is the sum of your account balance and your account’s floating P/L.

`Equity = Account Balance + Floating Profits (or Losses)`

### Example: Account Equity When an Existing Trade  is  Losing

Beyoncé tweets that she’s shorting GBP/USD. Because she’s Beyoncé, you follow what she says and go short also.

Price moves immediately against you and your trade shows a floating loss of \$50.

```Equity = Account Balance + Floating Profits (or Losses)

\$950 = \$1,000 + (-\$50)```

The Equity in your account is now \$950.

### Example: Account Equity When an Existing Trade is Winning

Beyoncé tweets again and says she’s changed her mind. She’s now long GBP/USD.

Not only is she Crazy in Love, but she seems crazy in trading also.

But because she’s the Queen B, you follow what she says and go long also.

```Equity = Account Balance + Floating Profits (or Losses)

\$1,100 = \$1,000 + \$100```

The Equity in your account is now \$1,100.

Your account equity continuously fluctuates with the current market prices as long as you have any open positions.

Equity shows the “TEMPORARY” value of your account at the current time. (Unlike a tattoo, which is…not temporary.)

That’s why Equity is seen as a “floating account balance“. It will only become your “real account balance” if you were to close all your trades immediately.

## What is the difference between Balance and Equity?

If your account is “flat” or does NOT have any positions open, then your Balance and Equity are the SAME.

But if you do have open positions, this is when the Balance and Equity differ.

• The Balance reflects your profit/loss from closed positions.
• The Equity reflects the real-time calculation of your profit/loss. The Equity takes into account both open AND closed positions.

This means that when you’re looking at your Balance, it is NOT the actual real-time amount of your funds.Since Equity includes current profits or losses from open trades, it is Equity that shows the real-time amount of your funds.

It’s possible to have a very large Balance, but very small Equity.

This happens when your open positions have a large unrealized (floating) losses.

For example, if your Balance is \$1,000, and you have an open trade that has a floating loss of \$900.

## Recap

In this lesson, we learned about the following:

• Equity is your account balance plus the floating profit (or loss) of all your open positions.
• Equity represents the “real-time” value of your account.

In previous lessons, we learned:

• What is Margin Trading? Learn why it’s important to understand how your margin account works.
• What is Balance? Your account balance is the cash you have available in your trading account.
• What is Unrealized and Realized P/L? Know how profit or losses affect your account balance.
• What is Margin? Required Margin is the amount of money that is set aside and “locked up” when you open a position.
• What is Used Margin? Used Margin is the total amount of margin that’s currently “locked up” to maintain all open positions.

Let’s move on and learn about the concept of Free Margin.

## What is Used Margin?

What does “Used Margin” mean?

In order to understand what Used Margin is, we must first understand what Required Margin is.

Whenever you open a new position, a specific amount of Required Margin is set aside.

Required Margin was discussed in detail in the previous lesson, so if you don’t know what it is, please read our What is Margin? lesson first.

If you open more than one position at a time, each specific position will have its own Required Margin.

If you add up all of the Required Margin of all the positions that are open, the total amount is what’s called the Used Margin.

Used Margin is all the margin that’s “locked up” and can’t be used to open new positions.

This is margin is already being “used”. Hence the name, Used Margin.

While Required Margin is tied to a SPECIFIC trade, Used Margin refers to the amount of money you needed to deposit to keep ALL your trades open.

## Example: Open a long USD/JPY and USD/CHF position

Let’s say you’ve deposited \$1,000 in your account and want to open TWO positions:

1. Long USD/JPY and want to open 1 mini lot (10,000 units) position.
2. Long USD/CHF and want to open 1 mini lot (10,000 units) position.

The Margin Requirement for each currency pair is as follows:

How much margin (“Required Margin”) will you need to open each position?

Since USD is the base currency for both currency pairs. a mini lot is 10,000 dollars, which means EACH position’s notional value is \$10,000.

Let’s now calculate the Required Margin for EACH position.

### USD/JPY Position

The Margin Requirement for USD/JPY is 4%. Assuming your trading account is denominated in USD, the Required Margin will be \$400.

```Required Margin = Notional Value x Margin Requirement

\$400 = \$10,000 x 0.04```

### USD/CHF Position

The Margin Requirement for USD/CHF is 3%.

Assuming your trading account is denominated in USD, the Required Margin will be \$300.

```Required Margin = Notional Value x Margin Requirement

\$300 = \$10,000 x 0.03```

```Used Margin = Sum of Required Margin from ALL open positions

\$700 = \$400 (USD/JPY) + \$300 (USD/CHF)```

Here’s a cool diagram of how Used Margin relates to Required Margin and Balance.

## Recap

In this lesson, we learned about the following:

• Used Margin is the TOTAL amount of margin currently in use to maintain all open positions.
• Said differently, it is the SUM of all Required Margin being used.

In previous lessons, we learned:

• What is Margin Trading? Learn why it’s important to understand how your margin account works.
• What is Balance? Your account balance is the cash you have available in your trading account.
• What is Unrealized and Realized P/L? Know how profit or losses affect your account balance.
• What is Margin? Required Margin is the amount of money that is set aside and “locked up” when you open a position.

Let’s move on and learn about the concept of Equity.

## What is Margin?

What is margin?

When trading forex, you are only required to put up a small amount of capital to open and maintain a new position.

This capital is known as the margin.

For example, if you want to buy \$100,000 worth of USD/JPY, you don’t need to put up the full amount, you only need to put up a portion, like \$3,000. The actual amount depends on your forex broker or CFD provider.

Margin can be thought of as a good faith deposit or collateral that’s needed to open a position and keep it open.

It is a “good faith” assurance that you can afford to hold the trade until it is closed.

Margin is NOT a fee or a transaction cost.

Margin is simply a portion of your funds that your forex broker sets aside from your account balance to keep your trade open and to ensure that you can cover the potential loss of the trade.

This portion is “used” or “locked up” for the duration of the specific trade.

Once the trade is closed, the margin is “freed” or “released” back into your account and can now be “usable” again… to open new trades.

## What is Margin Requirement?

Margin is expressed as a percentage (%) of the “full position size”, also known as the “Notional Value” of the position you wish to open.

Depending on the currency pair and forex broker, the amount of margin required to open a position VARIES.

You may see margin requirements such as 0.25%, 0.5%, 1%, 2%, 5%, 10% or higher.

This percentage (%) is known as the Margin Requirement.

Here are some examples of margin requirements for several currency pairs:

## What is Required Margin?

When margin is expressed as a specific amount of your account’s currency, this amount is known as the Required Margin.

EACH position you open will have its own Required Margin amount that will need to be “locked up”.

Required Margin is also known as Deposit MarginEntry Margin, or Initial Margin.

Let’s look at a typical EUR/USD (euro against U.S. dollar) trade. To buy or sell a 100,000 of EUR/USD without leverage would require the trader to put up \$100,000 in account funds, the full value of the position.

But with a Margin Requirement of 2%, only \$2,000 (the “Required Margin“) of the trader’s funds would be required to open and maintain that \$100,000 EUR/USD position.

### Example #1: Open a long USD/JPY position

Let’s say you’ve deposited \$1,000 in your account and want to go long USD/JPY and want to open 1 mini lot (10,000 units) position.

How much margin will you need to open this position?

Since USD is the base currency. this mini lot is 10,000 dollars, which means the position’s Notional Value is \$10,000.

Assuming your trading account is denominated in USD, since the Margin Requirement is 4%, the Required Margin will be \$400.

### Example #2: Open a long GBP/USD position

Let’s say you’ve deposited \$1,000 in your account and want to go long GBP/USD at 1.30000 and want to open 1 mini lot (10,000 units) position.How much margin will you need to open this position?

Since GBP is the base currency, this mini lot is 10,000 pounds, which means the position’s Notional Value is \$13,000.

Assuming your trading account is denominated in USD, since the Margin Requirement is 5%, the Required Margin will be \$650.

### Example #3: Open a long EUR/AUD position

Let’s say you want to go long EUR/AUD and want to open 1 mini lot (10,000 units) position.

How much margin will you need to open this position?

Assuming your trading account is denominated in USD, you need to first know what the EUR/USD price. Let’s say EUR/USD is trading at 1.15000.

Since EUR is the base currency, this mini lot is 10,000 euros, which means the position’s Notional Value is \$11,500.

Since the Margin Requirement is 3%, the Required Margin will be \$345.

### How to Calculate Required Margin

When trading with margin, the amount of margin (“Required Margin”) needed to hold open a position is calculated as a percentage (“Margin Requirement”) of the position size (“Notional Value”).

The specific amount of Required Margin is calculated according to the base currency of the currency pair traded.

If the base currency is DIFFERENT from your trading account’s currency, the Required Margin is then converted to your account denomination.

Here is the formula to calculate the Required Margin:

If the base currency is the SAME as your account’s currency:

`Required Margin = Notional Value x Margin Requirement`

If the base currency is DIFFERENT from your account’s currency:

```Required Margin = Notional Value x Margin Requirement
x Exchange Rate Between Base Currency and Account Currency```

The only reason for having funds in your account is to make sure you have enough margin to use for trading.

When it comes to trading forex, your ability to open trades is not necessarily based on the funds in your account balance. More accurately, it’s based on the amount of margin you have.This means that your broker is always looking to see if you have enough margin in your account, which can actually differ from your account balance.

If this sounds confusing, don’t you worry.  It’ll start to make more sense as we proceed.

## Recap

In this lesson, we learned about the following:

• Margin Requirement is the amount of margin required to open a position. It is expressed as a percentage (%) of the “full position” size or “Notional Value” of the position you wish to open.
• Required Margin is the amount of money that is set aside and “locked up” when you open a position.

In previous lessons, we learned:

• What is Margin Trading? Learn why it’s important to understand how your margin account works.
• What is Balance? Your account balance is the cash you have available in your trading account.
• What is Unrealized and Realized P/L? Know how profit or losses affect your account balance.

Let’s move on and learn about the concept of Used Margin.

## What is Unrealized P/L and Floating P/L?

In your trading platform, you will see something that says “Unrealized P/L” or “Floating P/L” with green or red numbers beside them.

In this lesson, we explain what Unrealized P/L and Floating P/L are.

When trading, there are actually two different types of “profit or loss”, also known as “P/L”.

Both are important. Let’s discuss the difference between the two.

## Unrealized P/L

Unrealized P/L refers to the profit or loss held in your current open positions….your currently active trades.

This is equal to the profit or loss that would be “realized” if all your open positions were closed immediately.

Unrealized P/L is also known as “Floating P/L” because the value is constantly changing since your positions are still open.

Your unrealized P/L continuously fluctuates (or “floats”) with the current market prices if you have open positions.

For example, if you currently have an unrealized profit, if price move against you, the unrealized profit can become an unrealized loss.

### Example: Floating Loss

Let’s say your account is in USD and you are currently long 10,000 units EUR/USD, which was bought at 1.15000.

The current exchange rate for EUR/USD is 1.13000.

Let’s calculate the position’s Floating P/L:

```Floating P/L = Position Size x (Current Price - Entry Price)

Floating P/L = 10,000 x (1.13000 - 1.15000)

-200 = 10,000 x (- 0.0200)
```

The position is down 200 pips.

Since you’re trading a mini lot, each pip is worth \$1.

So you currently have a Floating Loss of \$200 (200 pips x \$1).

It is a Floating Loss because you have NOT closed the trade yet.Usually, when a loss remains floating, you are hoping that the price will turn around.

If EUR/USD rose above your original entry price to 1.16000, then you would now have a Floating Profit.

The position is now up 100 pips.

Since you’re trading a mini lot, each pip is worth \$1.

So you currently have a Floating Profit of \$100 (100 pips x \$1).

## Realized P/L

Realized Profit is profit that comes from a completed trade.

Same thing with a loss.

Realized Loss is a loss that comes from a completed trade.

In other words, your profits or losses only become realized when the positions are CLOSED.

This is the only time when your account balance will change to reflect any gains or losses.

If you closed a position with profits, your account balance will increase. If you closed with losses, then your account balance will decrease.

### Example: Realized Loss

Let’s say your account is in USD and you are currently long 10,000 units of EUR/USD, which was bought at 1.15000.

The current exchange rate for EUR/USD is 1.13000.

Let’s calculate the position’s Floating P/L:

```Floating P/L = Position Size x (Current Price - Entry Price)

Floating P/L = 10,000 x (1.13000 - 1.15000)

-200 = 10,000 x (- 0.0200)
```

The position is down 200 pips.

And since you’re trading a mini lot, each pip is worth \$1.

So you currently have a Floating Loss of \$200 (200 pips x \$1).

It is a floating loss because you have NOT closed the trade yet.

But you can’t stomach losing anymore and decide to close the trade right then and there.You’ve realized the \$200 loss and the cash is DEDUCTED from your account balance.

But after you closed the trade with a \$200 loss, your Balance is now \$800.

### Example: Realized Profit

Let’s say your account is in USD and you are currently long 10,000 units of EUR/USD, which was bought at 1.15000

The current exchange rate for EUR/USD is 1.16000.

Let’s calculate the position’s Floating P/L:

```Floating P/L = Position Size x (Current Price - Entry Price)

Floating P/L = 10,000 x (1.16000 - 1.15000)

100 = 10,000 x (0.0100)
```

The position is up 100 pips.

And since you’re trading a mini lot, each pip is worth \$1.

So you currently have a Floating Profit of \$100 (100 pips x \$1).It is a floating profit because you have NOT closed the trade yet.

You’ve realized the \$100 gain and the cash is ADDED to your account balance.

But after you closed the trade with a \$100 gain, your Balance is now \$1,100.

## Profit Isn’t Real Until It’s Realized

The difference between realized and unrealized profit is subtle, but it can mean the difference between a profitable trade or a losing trade.

It is important for traders to clearly know how to differentiate between “realized” P/L and “unrealized” P/L

• Realized profits are gains that have been converted into cash and ADDED to your account balance.
• Realized losses are losses that have been converted into cash and DEDUCTED from your account balance.

Unrealized profit is theoretical profit or “paper profit” that is currently available, but could be taken away at any moment if the price moves against the trade.

When it comes to love, think about “the one” that got away. At one point in your life, he or she was an “unrealized” spouse.

You never built up the courage to pop the question and now you’re forever heartbroken with a “realized” loss of the perfect spouse.

This is exactly what happened to Bob.

To this day, Bob is still single.

This depressing life lesson from Bob’s sad love story can be applied to trading.

If you have not closed out of your position and “realized” your gain, you could still lose some, or all, of your profits.

Realized profit is real profit that can no longer be affected by price changes because it is no longer part of an active trade.

## Recap

In this lesson, we learned about the following:

• Unrealized P/L or Floating P/L refers to the profit or loss held in your current open positions….your currently active trades.
• Realized P/L refers to profit or loss from a completed trade.

In previous lessons, we learned:

• What is Margin Trading? Learn why it’s important to understand how your margin account works.
• What is Balance? Your account balance is the cash you have available in your trading account.

Let’s move on and learn about the concept of margin.

## What is Account Balance?

What does “Account Balance” mean?

In order to start trading forex, you need to open an account with a retail forex broker or CFD provider.

Once your account is approved, then you can transfer funds into the account.

The “Account Balance” or simply “Balance” is the starting balance of your account.

Basically, it’s the amount of CASH in your account.

Think of it this way:

`Balance = Cash`

If you deposit \$1,000, then your Balance is \$1,000.

If you enter a new trade or in trader lingo, “open a new position”, your account balance is not affected until the position is CLOSED.

This means that your Balance will only change in one of three ways:

2. When you close a position.
3. When you keep a position open overnight and either receive or pay swap/rollover fee.

Since the topic is about margin, the concepts of swap and rollover aren’t really related but for thoroughness, we’ll quickly describe it since swap fees do affect your Balance.

Just know that there’s a difference between a trade that lasts a couple of hours and a trade you keep open overnight.

The procedure of moving open positions from one trading day to another is called a rollover.Most brokers perform the rollover automatically by closing any open positions at the end of the day, while simultaneously opening an identical position for the following business day.

During this rollover, a swap is calculated.

swap is a FEE that is either paid or charged to you at the end of each trading day if you keep your trade open overnight.

If you are paid swap, cash will be added to your Balance.

If you are charged swap, cash will be deducted from your Balance.

Unless you’re trading huge position sizes, these swap fees are usually small but can add up over time.

In MetaTrader, you can see swaps on your open position (if you keep it open for longer than 1 day) by opening a “Terminal” window and clicking on the “Trade” tab.

The concept of swap and rollover is beyond the scope of this lesson and will not be discussed further, but we just wanted to cover if briefly for accuracy’s sake.

Now that we know what Balance means, let’s move on to understanding the concepts of “Unrealized P/L” and “Realized P/L” and how they affect your Balance.

The biggest appeal that forex trading offers is the ability to trade with margin.

But for many forex traders, “margin” is a foreign concept and one that is often misunderstood.

Bob sure knows his fried chicken and mashed potatoes but absolutely has no clue about margin and leverage.

Margin trading gives you the ability to enter into positions larger than your account balance.

With a little bit of cash, you can open a much bigger trade in the forex market.

And then with just a small change in price moving in your favor, you have the possibility of ending up with massively huge profits.

But for most new traders, because they usually don’t know what they’re doing, that’s not what usually happens.

More likely, price does move, but it moves against them.

Like what happened to Bob.

He was sure that this trade was going to be a winner so he bet BIG.

All of a sudden, to Bob’s surprise (and shock), he witnessed his trade being automatically closed on his trading platform and ended up suffering an epic loss.

The funds that now remain in Bob’s account aren’t even enough to open another trade.

He contacts his forex broker and is told that he had been “sent a Margin Call and experienced a Stop Out“.

Bob doesn’t know what the broker is talking about.

Bob is CLUELESS.

This is why understanding how margin works is essential.

A lot of new traders do not understand the concept of margin, how it’s used, how to calculate it, and the significance that it plays in their trading.

Do you know what margin actually is? What about used margin?

What is free margin? What is margin level? What is a margin call? What is a stop out or margin closeout?

As you can see, there is A LOT of “margin jargon” used in forex trading.

Before you choose a forex broker and begin trading with margin, it’s important to understand what all this margin jargon means.

If you don’t, it’s almost guaranteed that you will end up like Bob.

Terrible things will happen to your trading account like a margin call or a stop out. But you won’t even know what just happened or even why it happened.

If you really want to understand how margin is used in forex trading, you need to know how your margin trading account really works.

This starts with understanding what the heck some (really important) numbers you see on your trading platform really mean.

We’ll call these numbers your margin account’s “metrics”.

For example, take a look at the MetaTrader 4, also known as MT4, trading platform:

The metrics above are all intertwined.

A change in one causes a change in another.As a trader, you need to be aware of the relationships between them

BEFORE ever entering a single trade on a live account.

Don’t be like Bob.

Where certain metrics fall below a certain value, BAD THINGS will happen!

So you need to know what these metrics are!

You also need to know what these “bad things” are!

Make sure you have a solid grasp of how your trading account actually works and how it uses margin.

So let’s dive right in.

A margin trading account displays the following metrics:

• Balance
• Used Margin
• Free Margin
• Unrealized P/L
• Equity
• Margin Level

A metric is just a measurement of “something”.

This means that every metric above measure something important about your account involving margin.

For example, the “Balance” measures how much cash you have in your account. And if you don’t have a certain amount of cash, you may not have enough “margin” to open new trades or keep existing trades open.

Depending on the trading platform, each metric might have slightly different names but what’s being measured is the same.

Let’s take another look at the metrics on MetaTrader 4.

Same metrics as MetaTrader 4, but different labels.Don’t worry about the different labels right now, we’ll explain each margin-related metric in a way that you’ll be able to know which metric is which regardless of the exact label.

We’ll also let you know what other names that a specific metric is also known by. And at the end of this Margin Trading 101 course, we’ll provide a helpful “cheat sheet” for all this margin jargon.

Let’s now discuss each metric one-by-one in detail.