Free Margin
Definition
Free margin is the portion of your account equity that is not currently tied up as margin for open positions. It represents the buffer available to absorb losses or open new trades. When free margin falls too low, traders face margin calls or automatic stop-outs, making broker margin rules and transparency critical.
In Plain English
In plain terms, free margin is the money in your account that is still available. It is what remains after the broker sets aside margin to support your open trades. If free margin runs out, you cannot open new positions and existing trades may be closed automatically.
How It Works
- You deposit funds into your trading account, creating account equity.
- When you open a leveraged position, the broker reserves part of your equity as used margin.
- Free margin is calculated as equity minus used margin.
- As prices move, equity changes due to unrealised profit or loss.
- Losses reduce free margin; profits increase it.
- If free margin approaches zero, margin calls may occur.
- If free margin becomes insufficient, the broker may trigger stop-outs.
- Margin requirements and calculations vary by broker and instrument.
Why This Matters for Traders
Free margin determines how resilient an account is to adverse price movements. Traders with low free margin are vulnerable to sudden volatility, spread widening, and gaps. Many forced closures occur not because a trade idea was wrong, but because free margin was insufficient to withstand normal market movement. Monitoring free margin is essential for managing leveraged risk.
Common Misunderstandings
- Free margin equals available cash: it fluctuates constantly with market prices.
- Margin calls only happen at zero balance: they occur when free margin drops below thresholds.
- High leverage alone causes margin problems: poor margin buffers are the root issue.
- Free margin only matters for opening trades: it also determines survival of open positions.
- All brokers calculate free margin the same way: formulas and thresholds differ.
How This Affects Broker Choice
Broker margin policies directly affect how free margin behaves in real conditions. When comparing brokers, users should consider:
• How margin and free margin are calculated and displayed.
• Margin call and stop-out thresholds.
• Whether margin requirements change during volatility.
• Transparency of real-time margin metrics.
• Availability of negative balance protection.
From a monetisation and comparison perspective, free margin helps explain why some brokers feel more forgiving than others during market stress, supporting broker reviews and comparisons focused on risk controls.
Risks & Common Mistakes
• Running accounts with minimal free margin.
• Opening multiple correlated positions that drain free margin simultaneously.
• Ignoring spread widening and its impact on margin usage.
• Assuming margin calls provide ample reaction time.
• Choosing brokers with aggressive or opaque margin rules.
Risk note: low free margin increases the likelihood of forced closures and rapid losses, particularly in volatile or gapping markets.
Real-World Example
You have £5,000 in equity and £3,500 tied up as used margin.
• Your free margin is £1,500.
• A sudden adverse move causes a £1,200 unrealised loss.
Free margin drops to £300. At this point, further losses or spread widening may trigger a margin call or automatic stop-out, even if the market later recovers.
What to Check Before Trading
- How does the broker calculate free margin?
- Where is free margin displayed on the platform?
- At what free-margin level do margin calls occur?
- Can margin requirements increase during volatility?
- How quickly are margin metrics updated?
- Is negative balance protection in place?
- Are margin policies clearly documented?
Related Concepts
Margin determines how much equity is locked, affecting free margin.
Margin calls occur when free margin falls below safe levels.
Stop-outs are triggered when free margin becomes critically low.
Higher leverage reduces the free-margin buffer.
This limits losses when free margin collapses during extreme moves.
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Risk Warning: This website does not provide financial, investment, or trading advice. All information is for educational purposes only. Trading and investing involve substantial risk of loss. You should carefully consider your financial situation and consult with qualified professionals before making any financial decisions.