Every trader must be aware of the concept and working of margins in forex trading. Free margin in forex is one of the key logistics that you need to know well. In this article, you will learn about the free margin, its calculation, and other related terms. Margin trading can prove to be an excellent income generator for you but, you need to analyze the risks involved in this process as well. Once you are sure about the requirements and working with margins, you can accomplish great income rewards.
Everything you need to know about free margin:
What is margin in forex trading:
Margin is the small amount of money you need to deposit to open and secure a position. You don’t require to pay the whole amount but only a little percentage. This makes you eligible for holding a position. A broker keeps this percentage of money for as long as the trade is open. This money ensures that you can pay for the loss in the future.
For example, if you have to buy a position worth $1000, you don’t have to pay all of this but only a proportion of it, such as $10.
Free and used margin:
There are two types of margin in forex trading; used margin and free margin. Used margin is the total margin from the sum of all the positions that you hold in trading. In comparison, free margin is that margin that is free to use. Since the used margin implies your investments and the positions that you hold, free margin is the amount that can be used to open some new positions. Free margin can also be withdrawn from your account because it’s the amount that’s not in use for trading.
When free margin is zero:
When you have no funds to open new deposits or all your deposits are invested in holding positions, your free margin is zero. In this case, you can’t buy new positions in forex because you don’t have any usable margins available to secure in that case.
How to calculate free margin:
You can subtract the used margin in your account from your account equity to obtain the free margin. Now one may ask, what is equity? So account equity in forex trading refers to the sum of your account balance plus any loss or gain from an open position.
Formula for free margin is:
Free margin= Account equity- Margin
Similarly, the formula for equity is :
Equity= Used margin + free margin
Importance of margins:
Margins are the deposits that you require in order to secure a position in forex trading. This margin depends upon the amount of money you are trading with. You can gain huge amounts of money using the margin strategy. But remain careful in putting big margins because it’s a risky play.
Trading forex on margin is a famous technique these days. It’s essential to know the fundamental concepts of forex trading before using them practically. Take your time to get your concepts strong about forex trading so you can benefit from it.