What Is Margin In Trading?
Margin is the collateral a trader posts with a broker to open and maintain leveraged positions. Think of margin as a security deposit: it lets you control a larger position than your cash would normally allow, but it also exposes you to amplified gains and losses. In forex trading, margin is central to how the market works — if you want to trade the eur usd or gbp usd pairs you will use margin and leverage to increase exposure relative to your account size.
Margin Explained Simply
At its core, margin is not a loan you pay interest on (though financing fees can apply for overnight positions); it is the amount the broker requires to back your trades. If you have $1,000 in a trading account and open a position that requires $100 margin, the broker will hold that $100 while leaving the rest for other trades or withdrawals. The used margin is the part of your capital the broker reserves for each open position. You can open a new trade only if you have sufficient free margin.
Why Brokers Require Margin
Brokers require margin to limit counterparty risk and to ensure they can cover positions if the market moves against you. Margin rules protect both the trader and the broker by creating a buffer between the trader’s capital and the full market exposure. Different brokers and platforms come with different margin requirements, and the levels can change due to conditions market-wide, especially around big economic events or when trading cfds and leveraged instruments.
Understanding Equity In A Trading Account
Equity is your account balance plus or minus any unrealized profit or loss from open positions. It represents the real-time value of your account and is the source from which free margin is derived.
Equity Formula And Components
Equity = Account Balance + Floating Profit/Loss.
Account balance changes when trades are closed or when deposits/withdrawals occur. Floating P/L updates continuously while trades are open and directly affects equity. For example, if you go short on a currency pair and the rate moves in your favor, the unrealized profit will boost your equity.
How Equity Changes With Open Positions
Open positions cause equity to fluctuate. A winning trade increases equity and therefore increases free margin, while a losing trade reduces equity and can push you closer to a margin call. If you short the US dollar against the euro or if you buy the pound and it declines, your unrealized P/L will affect equity. Monitoring equity in real time on your trading platform helps you decide whether to scale down positions, hedge, or add funds.
What Is Used Margin?
Used margin (sometimes called required margin) is the amount of your equity allocated to hold current open positions. It is the portion of your capital that the broker sets aside so those trades can remain open.
Used Margin Definition
If you open a position, the broker will calculate how much capital must be reserved to support it. That reserved amount is used margin. Summing the margin for all open positions gives total used margin. In cfd trading and stock cfds the used margin varies by asset and provider.
How Position Size Affects Used Margin
Used margin scales with position size and leverage. Larger positions or higher notional exposure require more margin. For example, with a 1% margin requirement, a $10,000 position requires $100. Reduce your position size or use lower leverage to reduce used margin and increase breathing room. Choose a position size with risk management in mind — trading strategy and volatility should inform your choice.
What Is Free Margin?
Free margin is the amount of equity that is not tied up in used margin and is available to open new positions or to absorb unrealized losses. It’s the safety cushion traders rely on to avoid margin calls.
Free Margin Definition
Free Margin = Equity − Used Margin.
If your equity falls or used margin rises, free margin shrinks. You should track free margin especially when trading currency shorting strategies or when you decide to open additional positions.
How Free Margin Is Calculated
Calculate free margin by taking the current equity and subtracting the total used margin. Many trading platforms display this value prominently, but knowing the formula lets you verify it yourself and model scenarios before making a trade. If you lose money on a trade, free margin will fall and with it the ability to hold or open the next trade.
Why Free Margin Matters For Risk Control
Free margin determines how much buffer you have before the broker issues a margin call or starts closing positions. Traders who ignore free margin risk sudden liquidation during volatility. Maintain a healthy free margin to give your positions room to breathe and time to recover. Retail investor accounts that chase returns by increasing leverage often lose money rapidly because they ignore free margin dynamics.
What Is A Margin Level?
Margin level is a ratio that shows the relationship between equity and used margin, usually expressed as a percentage. It is a quick health-check metric for an account and often drives platform alerts and automatic actions.
Margin Level Formula:
Margin Level (%) = (Equity / Used Margin) × 100.
What Margin Level Tells About Account Health
Higher margin levels indicate more equity relative to required margin and therefore a safer cushion. Brokers set thresholds — for example, a margin call at 100% and a stop-out at 50% — but these numbers vary by provider. When trading, ensure you know your provider’s stop-out rules and the margin level that will trigger them.
How To Calculate Margin Levels Step-By-Step
Calculating these values manually is an essential skill when you want to test scenarios, verify platform numbers, or build your own alerts.
Calculating Equity
Start with your account balance, then add floating (unrealized) profit or subtract floating loss. This is your up-to-the-minute equity.
Calculating Used Margin
Sum the required margin for each open position. Required margin depends on the position size, the instrument’s margin requirement, and sometimes the current price. Brokers may list margin per lot or as a percentage of notional exposure.
Calculating Free Margin
Subtract total used margin from equity: Free Margin = Equity − Used Margin.
If this number is negative, the account is underwater and at risk of immediate action by the broker.
Calculating Margin Level (%)
Compute Margin Level (%) = (Equity / Used Margin) × 100.
If used margin is zero (no open positions), platforms typically show a very large or infinite margin level — effectively, you have full freedom to open trades.
Margin Example In Forex Trading
Worked Example With EUR/USD Trade
Suppose you have $5,000 in your account. You open a EUR/USD position with a notional size of $50,000 and your broker requires 2% margin for this instrument.
Step-by-step math:
- Account balance: $5,000
- No other open positions
- Used margin = $50,000 × 2% = $1,000
- Assume the trade currently shows an unrealized loss of $200, so equity = $5,000 − $200 = $4,800
- Free margin = $4,800 − $1,000 = $3,800
- Margin level = ($4,800 / $1,000) × 100 = 480%
Effect Of Leverage On Margin Calculations
Higher leverage lowers required margin for a given notional exposure, enabling larger positions with less capital. But the trade-off is reduced free margin buffers and greater sensitivity to market moves. Use leverage deliberately — it magnifies both wins and losses. If you use a demo account to test your approach, remember that live accounts come with slippage and execution differences.
Free Margin vs Used Margin vs Equity
Key Differences Explained
Equity reflects your real-time account value. Used margin is what’s set aside to keep trades open. Free margin is the spare capacity you can use to open additional trades or cover losses. All three move together during market volatility, but each has a different role in risk management.
Comparison Table For Traders
| Attribute | Equity | Used Margin | Free Margin |
| What it measures | Full account value | Capital reserved for positions | Available buffer to open new trades |
| Formula | Balance + Floating P/L | Sum of required margins | Equity − Used Margin |
| Changes when | Market moves, deposits/withdrawals | Opening/closing positions, margin rate changes | Equity changes or positions resize |
Margin Calls And Stop-Out Levels
What Triggers A Margin Call
A margin call occurs when the margin level falls below a broker’s threshold. This is usually because equity has declined (losing trades) or used margin increased (adding big positions). Brokers notify you to either close positions or deposit funds. Some brokers will automatically close positions when you fail to respond.
What Happens During A Stop-Out
If the account continues to deteriorate, the broker will execute a stop-out: automatically closing positions (often starting with the largest losing positions) until used margin falls and the margin level recovers. Stop-out rules vary by broker — know them before trading — and remember execution may happen at less favorable prices in fast markets.
Managing Margin Levels Effectively
Preventing Margin Calls
Keep conservative position sizes, use sensible leverage, and set stop-loss orders. Consider a minimum free margin threshold and automated alerts.
Managing risk includes position sizing, diversification, and avoiding correlated exposures. Lower leverage reduces the chance that normal market noise becomes a margin event.
Monitor Market Volatility
Volatility spikes eat into equity faster than calm markets. Use implied volatility, ATR, or an economic calendar to adjust position sizes ahead of big events. Also be aware that brokers may temporarily increase margin requirements around news releases.
Free Margin And Leverage — The Connection
How Leverage Impacts Margin Usage
Higher leverage reduces the upfront margin requirement, increasing your buying power — but it also tightens the free margin buffer. Even small adverse moves can then erode equity quickly; the math is simple but unforgiving.
Finding The Right Leverage Balance
There’s no universal ‘right’ leverage. Professional traders often use modest leverage relative to their strategy. Match leverage to trade frequency, stop distances (in pips or ATR multiples), and your overall portfolio risk. When in doubt, reduce leverage.
Margin Across Different Markets
- Forex Margin: Forex often offers high leverage and low margins for major pairs, but remember that currency moves can be sudden and brokers sometimes change requirements during news or illiquidity.
- CFD And Stock Margin: CFDs and stocks generally have higher margin requirements than major forex pairs. Stock margins can change with company events like earnings and corporate actions, so adjust your exposure around such dates.
- Crypto Margin Specifics: Crypto margin can be extreme: exchanges may offer very high leverage while crypto volatility can trigger rapid margin calls. Use extra caution and smaller position sizes when trading crypto on margin, and know how the exchange handles liquidations.
FAQ
Can You Withdraw Free Margin?
You can only withdraw funds that are not required as used margin. If you withdraw too much and reduce equity below required levels, you’ll increase the risk of margin calls. Always check used margin before moving funds.
Is Margin Money Free?
No. Margin is reserved capital. It’s not ‘free’ money you can spend; it’s collateral that secures your open positions. Misinterpreting margin as disposable capital is a common cause of account failure.
How Much Free Margin Should I Keep?
This depends on your trading style and risk tolerance. A practical rule is to keep enough free margin to cover expected drawdowns plus extra buffer for volatility—common targets are keeping minimum free margin equal to 20–50% of equity depending on how aggressive you are.
What Is A Safe Margin Level Percentage?
Safety depends on the broker’s thresholds. Many retail brokers set margin calls near 100% and stop-outs near 50%, but safer traders aim for margin levels well above those — for example, 300–500% or more — to allow for market swings and unforeseen slippage.
The Takeaway — Key Rules For Margin Mastery
- Know the formulas: Equity, Used Margin, Free Margin, Margin Level.
- Use position sizing and leverage to protect free margin.
- Monitor equity and set alerts before thresholds are breached.
- Treat margin as collateral, not profit.
- Tailor rules to market and account size — crypto needs tighter controls than major forex.
This guide gives a practical foundation and an action plan for retail investors who want to manage margin responsibly while using tools and platforms to trade. Use a demo account to practice, learn to short and to buy with confidence, and always do research and technical analysis before you open a position. Remember: trading involves risk, and complex instruments come with a high risk of losing money. Read full provider conditions, use regulated brokers, and keep records in your trading log.