Margin/Free Margin/Equity

I feel a bit ashamed asking this question as I probably should understand it by now. (Took me a while to understand the concept of spread).

My question is: What is Margin/Free margin/equity and how do these realte to each other? I notice when I have no open trades these values are all the same as the balance however when I open a trade they change.

Am I right is assuming free margin is a value that decreases by a fixed amount per lot of open trades? Eg. $200 per lot, and this stays the same regardless of whether the trades go into positive or negative territory?

From what I understand equity is basically the value the account balance would become if you immediately closed off all trades. Is this correct?

Sorry for sounding like an idiot but it can be difficult enough to find clear explainations of these on the web.

been there...
let me try to explain it in a few words: margin is the amount of money required to open a trade. Free margin is the amount of money in your account available to open new trades based on your current margin use and equity. So Equity-Margin= free margin. The free margin available will increase/decrease depending on the profit (or loss) of your open position. I hope it makes sense.


sorry I forgo to mention the equity, yes you are correct, equity is your current account value if you were to close all trades at that time.

I kinda get it (brain's a little fried today)

So each opened trade eats up a certain amount of money straight away, which is called the margin. Depending on how this trade goes this value can get bigger or smaller and this is Dependant on the broker?

you might be looking at this from the wrong direction.

i'm assuming you are using leverage, as most-everyone is. what does this mean? it means you need only a small amount of money in your trading account to open a position that is probably hundreds of times larger than this.

e.g. you have $100 in your account, yet your broker lets you open a position that is the equivalent of moving $10,000. why? because currencies move fractionally, so to realise any real / decent profit or loss means you need to move a large amount of money for the fractional price changes to mean something worthwhile.

to further clarify... imagine if currency a/b was sitting at 1.0000 . imagine you opened a position with one boring old dollar. imagine currency a/b moved to 1.0001. imagine closing your position. without spread, you have made $0.0001. how boring. what about if you had opened a position with $10,000? then you would have made $1. if you had opened a position with $100,000 (which is generally regarded as '1 lot') then you would have made $10 just on that tiny fractional price movement.

most people who are hoping to make money in forex do not have a $10,000 account, let alone a $100,000 account. normally it will be a $100 / $500 / $1,000 account that they will blow and wonder how on earth does anyone make money doing this. keeping this in mind your broker will still allow you to open a position greater than your account due to the previously illustrated small movements of price equating to miniscule changes in account values unless the position traded is significant (1 lot for example). this allows you as a small fish to realize reasonable profits or losses instead of silly amounts like $0.0001. along with this, and more to the point, it allows the brokers to make reasonable profits from their spread-padding baked into the spread you see so that each position you open also gives them a little bit of real money too and not miniscule amounts that would send them bankrupt due to such low cashflow being overwhelmed by normal real-world business costs.

what happens if you have a $100 account, your broker lets you open a $10,000 position, and currency a/b that started at 1.0000 dropped to 0.9900 and you are sitting on a buy position that is losing money? well, your equity would be showing $0 because a $10,000 position would be at a loss of $100 at this price level.

your broker simply does not allow this to happen. they decide that at a certain point if a position has eaten into your equity x% then they pull the plug on the position and you are then left with an account that is significantly battered and bruised (and smaller than before). further to this they certainly won't allow your account to get to a level where it is actually in negative, in which case you would be owing them money.

i suspect you are correct in that each broker decides their x% account level themselves and their is no set value. i haven't looked into this because it simply does not interest me and does not impact me in any way so yeah... grain of salt. further to this, if this is true, i am guessing they close your position at a point before it zeroes your account for historical reasons... that being that at the 'margin-call' level historically a trader had the option of adding funds to the account. this means that to do something like this would mean they would have to set the margin-call level at a place before zero so that there was a literal buffer of funds left. if the margin-call was at zero funds left then that would mean by the time further funds were added (or more to the point, not added) then the account could very-well be in negative numbers meaning the trader owed the brokers money.

tired. ramble. grain of salt.

thanks for all that, but I knew it already

I understand leverage, and eqquity, what I don't understand is MARGIN, more specifically the actual calculations that are used by the software to calculate the free margin at any given time. I'm writing my own simulation software and I want it to mimic the broker as accurately as possible. I don't find this topic interesting either and that's probably why I've never bothered to learn about it till now

oh right. i got ya. oh well.

Let's try with an example:

Say you have $5000 in your account and no open positions (flat). At this stage your Margin is = zero and your free margin is = $5000, your equity is = $5000 and your balance is = $5000.

Then you decide to BUY 1 lot on EURUSD and you get filled @1.3900 (leverage 100:1) your Margin is $1390. Let's assume market moves to 1.3910 your equity is now $5100, your balance is still $5000 your margin is still $1390 (as Margin doesn't fluctuate once the position is open). So, your Free Margin will be (EQUITY - MARGIN) $5100 - $1390 = $3710. This is the amount of money available in your account at that exact moment to be used to open new positions.

Thanks for that simple explanation! Just one more thing: Where do you arrive at the figure $1390 ? Does this come from the 1.3900 times 1000?

- Sorry for the late reply
To get to $1390 I considered leverage 100:1 that is 1%. So, if a standard lot is 100,000 Euros therefore 1% is 1,000 euros times the EURUSD rate, therefore: 1,000 x 1.39 = $1,390.

Not sure if this is the right place to post this, but does anyone have an indi that will calculate whether the current value of AccountMargin() is its highest value between 2 specified times?

I'm thinking something along the lines of *check to see if time is between 2 external date strings, then if current (this bar's?) value > previous highest value, current (this bar's?) value = new highest value, else previous highest value = new highest value* , but I've had no joy coding it

Hi all,

I hope this is not a stupid question. I'm using a real account from a reputable broker. Due to the uncertainties for the particular currency, my broker increased the margin requirement by around x5 to x7 over the weekend resulting my trade to close immediately when trading starts during the weekday. Notification email was send by the broker but i admit that i ignored the email. So i just want clarification from your experience of different brokers if this things happens and its normal? Or it just happens to several broker only? I'm having a comfortable free margin (80% free margin available) approaching the weekend and i thought everything is ok and then suddenly all my profitable trade close because the of the jump in margin requirements by x7 times (somewhere around there) due to uncertainties of the currency as informed.

Please advice. Thank you very much.

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hey ck..... it's a good question..... oanda and fxcm occasionally lowers or raises the leverage on some pairs..... this increases or decreases the margin required like you mentioned ......

from my experience, each time it was done, it was done for our protection and obviously theirs.....

make sure you completely understand leverage and how it effects margin required..... and how the can-be-expected wide spreads at markets opening can further hurt..... it can be confusing.....

I'm having a comfortable free margin (80% free margin available) ...... free margin is usually in terms of dollars , not percent.....

margin level is usually in terms of percent and 80% is quiet low...... my margin level tends to be well above 500%.....

free margin $ = equity $ - margin used $....

margin level % = equity / margin used......

so if your equity is 1000 and you have used 1000 in margin, your free margin would be 0 and margin level would be 100%.......h