If you are in fx trading business, and if you find yourself lost in its technical terms, then this is the right place where you will get detailed description of different terms related to fx. In this article, I will explain the two most important terms in trading, and they are what is free margin in forex. Along with these two, I will also emphasize on one more factor - margin call.
Understanding margin in forex trading
This is the amount which is required to open a new position in trading. Using margin in forex business is considered to be a new concept for most of the traders, and thus, it is often misunderstood.
Margin is not a fee or a sum of charges applied for maintaining fx trading account. It mainly serves the purpose of traders in having a sufficient balance in their accounts relative to the size of their position.
How to trade on margin?
Trading is nothing but taking a short-term credit from the broker. One has to set a account with a broker before starting trade on margin. The immediate step will be to credit capital in that trading account.
In most of the cases, brokers mainly charge or ask for $100 for 1 or 2% and trading up to the value of $100,000. In this way, the traders will only offer 1% of their trading capital, whereas broker provides the rest (99%).
Now let me explain the other concept or term, whatever is suitable for you, it is forex trading free margin.
What is free margin in forex?
Free margin in trading is the amount of capital in the account of a trader minus the used.
Suppose a trader has a $1000 in his trading account and he has opened 1 mini lot which entails a margin of $100. In that case, free margin will be $900.
Fx trading free margin = Fx Equity - Margin
Note: Whenever a trader has no position, then no money available in the trading account of the trader will be used as margin and all the money is completely free.
Let us quote an example for the calculation of free margin.
For an instance, you have $10,000 in your account, and you also have an open position which has $600 value. The traders’ position is also $400 in profit.
Let us apply the formula to get the result-
Equity = $10,000 + $600 = $10,600
Therefore, fx free margin = $10,600 - $400 = $10,200
What is margin call?
This is actually a warning from the brokers that the account of the trader in question has slipped past the requirement margin of 1%. Also, it also notifies that there is no sufficient equity on the account in order to support their open trades further.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.