Free Margin

Free margin is the amount of trading capital in your account that is not currently tied up as margin for open positions, and is therefore available to open new trades or absorb floating losses.

Quick Definition Box

Free margin = Equity − Used Margin. It represents the "breathing room" in your trading account. If free margin drops to zero, you cannot open new positions; if it goes negative, you risk a margin call or stop-out. Monitoring free margin is essential for effective money management and avoiding forced liquidation.

Detailed Explanation

To understand free margin, you must first grasp three related concepts: balance, equity, and used margin.

• Balance is your account's starting capital plus realized profits and losses (closed trades).
• Equity is your current account value: balance plus or minus floating (unrealized) profit/loss from open positions.
• Used margin is the amount of capital "locked" by your broker to keep your current positions open. It is calculated as the sum of the required margin for each open trade, based on leverage and position size.

Free margin is simply the difference between equity and used margin:

Free Margin = Equity − Used Margin

For example, if your equity is $10,000 and your used margin is $2,500, your free margin is $7,500. That $7,500 is available to open new positions. Once you open a new trade, part of that free margin becomes used margin, reducing free margin accordingly.

Free margin is dynamic. It changes with every tick of the market because floating profits and losses affect equity. If your open trades move in your favor, equity rises, and free margin increases. If they move against you, equity falls, and free margin shrinks—even if your used margin stays constant.

When free margin reaches zero, you cannot open any new positions. If it goes negative (equity falls below used margin), your broker will typically issue a margin call and may automatically close your losing trades at the stop-out level (often 50% or 100% margin level, depending on the broker). This is why free margin is a critical early-warning indicator for risk management.

Real-World Example

Let's walk through a concrete scenario with a $5,000 account and 1:100 leverage.

1. Initial state: Balance = $5,000, Equity = $5,000, Used Margin = $0, Free Margin = $5,000.

2. You open a position on EUR/USD with a notional value of $50,000. With 1:100 leverage, the required margin is $500 (50,000 ÷ 100). Now:

   • Used Margin = $500
   • Equity = $5,000 (no floating P/L yet)
   • Free Margin = $5,000 − $500 = $4,500

3. The trade moves against you by $300 (floating loss). Now:

   • Equity = $5,000 − $300 = $4,700
   • Used Margin = $500 (unchanged)
   • Free Margin = $4,700 − $500 = $4,200

4. The trade moves in your favor by $200 (floating profit). Now:

   • Equity = $5,000 + $200 = $5,200
   • Used Margin = $500
   • Free Margin = $5,200 − $500 = $4,700

Notice that used margin stays fixed unless you change position size or leverage. Free margin fluctuates purely because equity changes with floating P/L.

If you wanted to open a second position requiring $1,000 margin, you could do so as long as your free margin is at least $1,000. In step 3, free margin was $4,200, so you could open it. In step 4, free margin was $4,700—still enough. But if your floating loss grew to $4,500, free margin would be $0, and you'd be blocked from opening any new trades.

Why It Matters for Traders

Free margin is the practical limit on your trading activity. It directly affects:

• Ability to open new positions: If free margin is insufficient, your broker will reject new orders. This is not a suggestion—it's a hard constraint.
• Risk of stop-out: When free margin approaches zero, you're one bad tick away from forced liquidation. Monitoring free margin helps you anticipate margin calls before they happen.
• Position sizing decisions: Knowing your free margin helps you calculate how much risk you can take on a new trade without over-leveraging. This ties directly into the two-percent-rule and Kelly criterion, which both require you to know your available capital.
• Emotional discipline: Watching free margin drop rapidly can trigger panic or revenge trading. Understanding its mechanics helps you stay rational.

Free margin is not a measure of profit or loss—it's a measure of available capacity. A trader with a large floating profit has high free margin, but that profit is unrealized and can vanish. Conversely, a trader with no open positions has free margin equal to full equity, but that doesn't mean they're making money.

Common Misconceptions

Misconception 1: "Free margin is my profit."
False. Free margin is simply unused equity. It includes floating losses and profits, but it's not a realized gain. You can have high free margin while being in a losing trade overall.

Misconception 2: "If free margin is positive, I'm safe."
Not necessarily. Free margin can be positive but small relative to your used margin. A margin level (equity ÷ used margin × 100) below 100% means free margin is negative, but even at 150% margin level, you're close to a stop-out if your broker's threshold is 100%. Positive free margin is not the same as adequate free margin.

Misconception 3: "Increasing leverage increases free margin."
Leverage affects used margin, not free margin directly. Higher leverage reduces used margin for a given position size, which can increase free margin. But it also increases risk per pip, so floating losses will eat into equity faster. Higher leverage does not create capital—it just changes the math of how quickly free margin disappears.

Related Terms

• risk-reward-ratio
• drawdown
• money-management
• two-percent-rule
• kelly-criterion

How XM Compares

XM, like most regulated forex brokers, displays free margin in the trading platform's "Account" or "Trade" tab. The calculation is standard: equity minus used margin. XM's margin requirements depend on the account type and leverage offered, which can vary by region and regulatory status. For example, a standard account with 1:100 leverage will have different used margin than a micro account with 1:500 leverage. Traders should always verify current margin requirements, leverage limits, and stop-out levels on XM's official website or in the platform's contract specifications, as these can change. The concept of free margin itself is universal—only the numbers differ.

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⚠️ This glossary entry is educational. Forex/CFD trading carries high risk. This is not investment advice.

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