When you are in the foreign exchange market, then you have to be well acquainted with all the technical terms used in trading of forex. In this context, there is a term commonly used, and it is forex margin and forex free margin. In this post readers will be able to understand both these concepts and hopefully they will use the skills acquired through them successfully while trading forex.
What is forex margin?
The margin in forex trading actually points to an amount of money in trading account of the trader available for the same purpose. It is also known as Forex margin trading, and it also offers the ability to trade 10 to 200 times the value of deposit made by the trader for currency trading.
Let’s quote an example.
For a margin trading of 1%, the broker will ask the trader to credit his account with $1000. So, the trader will only provide $1000 of his trading capital, and broker will then allow the trader to trade up to $100,000.
Considering currency pair GBP/USD. Now if GBP/USD is trading at 1.5000, then it suggests that one British Pound worth 1.5000 US Dollars. If now the trader wants to buy 10,000 Pounds, then he has to sell 15,000 US Dollars. Thus, margin of the trader required will be 1% of $15,000 that is equivalent to $150.00. So, through this example, it is clear that the traders can buy a large amount of currencies through investing a small amount.
Now let us consider another most significant technical term which is forex free margin.
What is free margin in forex?
Free margin is actually the difference of equity of traders account and open positions margin.
The formula to calculate free margin is – Free Margin = Equity – Margin
Forex free margin also denotes the available funds on traders’ account. These funds will not be regulated as indemnity in trades on financial market. But the same funds can be utilized for any given operation in which there is an opening of a current position and withdrawal is also there.
When a trader has no position, no money from the account of trader will be used as margin. So, the money the trader is having in his account is completely free.
Let us consider an example in order to understand Forex free margin easily.
Suppose, a trader is having $10,000 account and he is also having some open positions along with total marginal value of $800. Also, positions of the trader are $500 in profit.
So, in order to get the result, we have to apply the formula-
Equity = $10,000 + $500 = $10,500
So, forex free margin = $10,500 - $800 =$9,700
Note: It is evident that as long as the trader has no position, account equity of the trader and free margin will remain same as his account balance.
Hopefully, all the readers have understood the ‘forex what is free margin.' For further queries, they can share them through the comments (section) provided below.