Equity less the margin tied:what's free is what you've left to ride.
The equity in an account that is not tied up as margin for open positions and is therefore available to open new positions or absorb losses.
In plain words
Free margin is the part of an account’s equity that is not set aside as margin for open positions. Margin is the deposit a broker holds against each open trade; whatever equity is left over is free to support new positions or to absorb losses on existing ones.
free margin = equity − used margin
See it move
Free margin is about four fifths of Equity (as in the lesson)
Why it matters
Free margin shrinks when open positions lose and when new positions are opened. When it reaches zero no new position can be opened, and further losses bring the account towards a margin call.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
An account in US dollars has equity of 5,000 and one position open with a notional value of 100,000 US dollars at leverage of 1:100 (invented figures).
- 1Used margin = 100,000 × 1% = 1,000
- 2Free margin = 5,000 − 1,000 = 4,000
- 3After a further loss of 1,500equity = 5,000 − 1,500 = 3,500
- 4Free margin = 3,500 − 1,000 = 2,500
Free margin falls from 4,000 to 2,500 as the loss reduces equity, while used margin stays at 1,000.
A common mistake
Free margin is not spare money that sits apart from open trades. It is calculated from equity, so it falls with every pip an open position loses.
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Educational information, not investment advice or a recommendation to trade.