Understanding Margin in Forex Trading
Definition of Margin
A margin is essentially a deposit that the person must pay to enter and to keep a trading position that is under leverage, thereby acting as a sort of collateral that is charged by their brokers with some measure of assurance that their potential losses will get paid. Margin is not an expense, in contrast to a fee; rather, a margin becomes a fraction of one’s trading balance that is set aside for opening a position.
How Margin Works in MT4 and MT5
The margin on MT4 and MT5 is focused on leverage and account size with specifications as per asset class in opening a position. Required margin is deducted from the trader’s account balance right after opening a position in order to keep the trade running with sufficient funds.
Role of Leverage in Margin Trading
By virtue of the leverage, the probability of profit is also increased along with that of risk, since it enables a trader to control a large position with little capital investment. For example, 1 : 100 leverage allows to control a $100,000 position with $1,000 invested. But, in point of fact, high leverage just erodes free margin and does not do anything except to make contracts being called.
What is Free Margin?
Free Margin vs. Used Margin
Free margin is the available capital that is not currently being used as margin for open positions. It is calculated as follows:
Free Margin = Equity – Used Margin
- Used Margin: The amount of balance allocated to maintain open trades.
- Free Margin: The remaining balance available for opening new trades or absorbing losses.
Importance of Free Margin for Trade Execution
Free margin plays a crucial role in determining whether a trader can open additional positions. If free margin falls too low due to adverse market movements, a margin call may be triggered, leading to automatic position closures.
Equity and Its Connection to Margin
How Equity Affects Free Margin
Equity represents the total value of a trader’s account, including unrealized profits and losses. Since free margin is derived from equity, changes in open trades directly impact the available free margin.
Equity Calculation in MT4 and MT5
In MT4 and MT5, equity is calculated as:
Equity = Balance + Floating Profit/Loss
A trader with positive floating profits will have increased free margin, whereas a trader experiencing losses will see a decline in free margin.
Examples of Margin and Free Margin in Action
Example 1: Trading with a Low Free Margin
A trader with $5,000 in equity opens a leveraged position that requires $4,800 in margin. This leaves only $200 as free margin, meaning minor market fluctuations could lead to a margin call.
Example 2: Managing Free Margin to Avoid Margin Calls
A trader maintains a healthy free margin by managing position sizes and setting stop-loss orders. By keeping sufficient free margin, the trader avoids forced liquidations and maintains better control over trades.
Key Differences Between Margin and Free Margin
| Aspect | Margin | Free Margin |
| Definition | The capital set aside to maintain open positions | The remaining balance available for new trades |
| Calculation | Required Margin per trade | Equity – Used Margin |
| Impact | Determines position size | Determines ability to open new trades and sustain losses |
| Risk | If insufficient, can trigger margin calls | Low free margin increases the risk of forced liquidation |
Similarities Between Margin and Free Margin
- Both are essential for maintaining trading positions.
- Both fluctuate based on market movements and equity changes.
- Both directly impact a trader’s ability to execute trades.
How to Manage Margin and Free Margin Effectively
Avoiding Margin Calls and Stop-Outs
- Monitor margin levels and maintain a healthy free margin.
- Avoid over-leveraging and maintain proper risk management.
- Close losing trades before equity falls below the margin requirement.
Strategies for Maintaining Healthy Free Margin
- Use lower leverage to reduce risk exposure.
- Diversify trading positions to avoid excessive concentration.
- Keep sufficient balance in the account to absorb market volatility.
Risk Management Techniques
- Set stop-loss orders to limit potential losses.
- Regularly assess market conditions and adjust trading strategies accordingly.
- Utilize margin calculators to estimate risk before opening positions.
Conclusion
In trading management with MT4 and MT5, an important distinction to be made is between margin and free margin. Having free margin available protects traders from being margin-called and offers them flexibility to trade.
Start Trading with an Optimized Margin Strategy
Open a Trading Account
Select a reliable broker that offers competitive margin requirements and transparent trading conditions.
Download the MT4/MT5 Platform
Install the appropriate trading platform to access advanced margin management tools and analytics.
Begin Trading Safely and Strategically
Implement strong risk management strategies, monitor free margin levels, and optimize leverage to sustain long-term trading success.