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# Free Margin

## Definition

Margin can be classified as either “used” or “free”. Free Margin is the difference between Equity and Used Margin.

## Calculation

**Equity**: This is the total value of the trader’s account, including the initial deposit and any unrealized profits or losses from their open positions.**Used Margin**: This is the total margin requirement for all the trader’s open positions. It’s the amount of capital that is “tied up” to maintain those positions.**Free Margin = Equity – Used Margin**

## Interpretation

Free Margin can be thought of in two ways:

### Available to open new positions

The Free Margin represents the amount of capital the trader can use to open new trades. This is important because brokers require a certain amount of margin to be deposited before opening a new position.

### Buffer against losses

The Free Margin acts as a cushion against potential losses on the trader’s existing positions. As long as the account balance (Equity) remains above the Used Margin, the trader will not receive a margin call or experience a stop-out (forced position closure).

# Calculating Free Margin

## Equity and Used Margin

### Equity

Equity represents the total value of the trader’s account, including the initial deposit and any unrealized profits or losses from their open positions.

### Used Margin

Used Margin is the total margin requirement for all the trader’s open positions. It’s the amount of capital that is “tied up” to maintain those positions.

## Formula for Free Margin

The formula for calculating Free Margin is:

**Free Margin = Equity – Used Margin**

## Example: No Open Positions

Let’s start with a simple example where the trader has no open positions.

**Deposit**: The trader deposits $1,000 into their trading account.**Equity**: Since the trader has no open positions, the Equity is equal to the account balance, which is $1,000.**Used Margin**: With no open positions, the Used Margin is $0.**Free Margin**: Plugging the values into the formula:- Free Margin = Equity – Used Margin
- Free Margin = $1,000 – $0 = $1,000

In this scenario, the trader’s Free Margin is equal to their account balance of $1,000, as they have no open positions and no margin being used.

## Example: With Open Positions

Now, let’s consider a scenario where the trader has open positions.

**Deposit**: The trader deposits $1,000 into their trading account.**Open Positions**: The trader opens positions that require $600 in Used Margin.**Equity**: Assuming the trader’s open positions have not generated any unrealized profits or losses, the Equity is still $1,000.**Used Margin**: The Used Margin is $600, as this is the total margin requirement for the trader’s open positions.**Free Margin**: Plugging the values into the formula:- Free Margin = Equity – Used Margin
- Free Margin = $1,000 – $600 = $400

In this scenario, the trader’s Free Margin is $400, as they have $400 in excess equity that is not being used as margin for their open positions.

# Example: Open a Long USD/JPY Position

## Step 1: Calculate Required Margin

Let’s say you have an account balance of $1,000 and you want to go long USD/JPY, opening a 1 mini lot (10,000 units) position. The Margin Requirement is 4%.

To calculate the Required Margin, we use the formula:

**Required Margin = Notional Value x Margin Requirement**

The Notional Value of the 1 mini lot position is $10,000 (10,000 units of USD). Plugging in the values:

Required Margin = $10,000 x 0.04 = $400

So, the Required Margin to open this position is $400.

## Step 2: Calculate Used Margin

Since we only have this one position open, the Used Margin is equal to the Required Margin, which is $400.

## Step 3: Calculate Equity

Let’s assume the price has moved slightly in your favor, and your position is now trading at breakeven, with a Floating P/L of $0.

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

Equity = $1,000 + $0 = $1,000

## Step 4: Calculate Free Margin

Now, we can calculate the Free Margin using the formula:

**Free Margin = Equity – Used Margin**

Free Margin = $1,000 – $400 = $600

The Free Margin is $600, which means you have $600 available that is not being used as margin for the open position.

## Roundup

### Free Margin

– 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.

### Previous Lessons Recap

In previous lessons, we covered the following concepts:

### Margin Trading

– Learned why it’s important to understand how your margin account works.

### Balance

– Your account balance is the cash you have available in your trading account.

### Unrealized and Realized P/L

– Learned how profit or losses affect your account balance.

### Margin

– Required Margin is the amount of money that is set aside and “locked up” when you open a position.

### Used Margin

– Used Margin is the total amount of margin that’s currently “locked up” to maintain all open positions.

### Equity

– Equity is your Balance plus the floating profit (or loss) of all your open positions.

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