Direct answer
Free margin in forex is the part of your account equity that is not currently being used as margin for open positions. Conceptually, it measures “headroom” for the account after reserving the margin needed to support trades that are already open. As prices move and as open positions gain or lose value, equity changes, and that in turn changes free margin.
The simple model: definitions
A practical way to understand free margin is with three terms:
- Equity: the value of the account including the current value of open positions. Equity typically equals balance + floating profit/loss (where floating profit/loss reflects unrealized gains or losses from open positions).
- Used margin: the amount reserved by the broker for open positions, based on the instrument, leverage rules, and the position size.
- Free margin: the equity that is not reserved as used margin.
In a basic form, you can express it as:
Free Margin = Equity − Used Margin
This is a mechanism for understanding the relationship. The exact way a broker computes equity and used margin can vary by platform rules, instrument specifications, and account settings, so the most reliable definition is the one documented by the provider.
Inputs and outputs: what changes free margin
1) Inputs that affect equity
Free margin reacts to changes in open positions because equity changes when the floating profit/loss changes.
- If the market moves in your position’s favor, floating profit increases equity, which can increase free margin.
- If the market moves against your position, floating profit becomes less favorable (or turns into floating loss), which can reduce equity and free margin.
2) Inputs that affect used margin
Used margin is linked to the requirements needed to keep open positions supported. In general terms, used margin changes when:
- you open additional positions (used margin increases),
- you close positions (used margin decreases),
- the required margin changes due to broker rules (for example, different leverage factors, margin rates, or instrument-specific settings),
- margin conditions are adjusted due to account or platform policies.
3) Output: free margin level and what it means
The output—your free margin figure—then serves as an internal constraint for risk controls. When free margin becomes low, it can signal that there may not be enough remaining equity to support the open positions under the broker’s margin rules.
Different providers implement different controls, but typical categories include:
- limits on opening new positions,
- forced reductions or automatic closure procedures for existing positions when the account cannot meet margin requirements.
Because these rules are provider-specific, the threshold behavior is not something you can infer purely from the formula.
A worked example with explicit assumptions
Below is a simple numeric example to show the sequence. It assumes a basic relationship of Free Margin = Equity − Used Margin and assumes that only one open position’s floating profit/loss changes.
Assumptions
- Starting balance (cash component): 1,000
- Used margin for the currently open position: 300
- At the moment you check free margin, floating profit/loss is either +100 or −100.
Case A: floating profit
- Equity = balance + floating P/L = 1,000 + 100 = 1,100
- Free margin = equity − used margin = 1,100 − 300 = 800
Case B: floating loss
- Equity = 1,000 − 100 = 900
- Free margin = 900 − 300 = 600
What this illustrates
- Even if used margin stays the same, free margin can still change because equity changes.
- Free margin is not a forecast of future outcomes; it is an accounting snapshot derived from current unrealized results and margin reservations.
In real trading, multiple positions may be open, margin requirements can differ by instrument and position size, and costs can affect net equity. Those factors can all shift the numbers.
Limitations and failure modes to watch
1) Provider-specific margin calculations
The formula explains the relationship, but the details—especially how used margin and equity are computed—vary across brokers and platforms. That means two accounts with the same balance and positions could show different free margin values if their margin model differs.
2) Rapid changes near margin thresholds
Free margin can change quickly when prices move, because floating profit/loss changes continuously. If margin rules are close to a limit, small price movements can produce large relative effects on free margin.
3) Execution and cost uncertainty
Even without assuming real-time data, trading outcomes depend on execution quality and costs such as spreads, commissions, and swap/overnight charges (when applicable). These factors can affect equity and therefore free margin between checks.
4) Different risk-control behaviors
When free margin falls, providers may respond differently: they may restrict new trades, require additional margin, or initiate automatic closure or reduction of positions. The existence of a “failure mode” is consistent, but the exact mechanics and thresholds are not universal.
How to verify the facts independently
To independently verify what free margin means for your situation, check three items in your provider’s documents:
- The definition of equity (how floating profit/loss is included).
- The definition of used margin (how margin requirements are calculated per instrument and position size).
- The provider’s risk controls tied to margin levels (what happens when free margin is low).
If your platform allows it, compare the displayed free margin with a manual calculation using your balance, current floating profit/loss, and the used margin figure shown by the platform. If the numbers align within your platform’s rounding rules, the underlying mechanics are consistent with the conceptual model.
Verification or next question
If you want to go one step further, the key follow-up is: Which exact components does your platform use to compute equity and used margin for your account and instruments? Once you know that, you can map free margin changes to the specific inputs that matter in your setup—without relying on predictions.