Direct answer: what equity and free margin mean
Equity in forex trading is the current value of your trading account when unrealized profit or loss from open positions is included. In plain terms: it is what your account is worth right now, not only what you deposited.
Free margin is the part of your equity that is not required as margin for your currently open positions. It represents how much “buffer” remains in the account to support additional positions (or to absorb further losses) under the account’s margin rules.
Explanation and mechanics: how they relate
To understand how both concepts work together, it helps to separate three ideas:
- Balance: the money amount after completed trades (realized results).
- Equity: balance plus the unrealized profit or loss from open trades.
- Free margin: equity minus the margin currently used by open positions.
A common way to express this relationship is:
- Equity = Balance + Unrealized P/L
- Free margin = Equity − Used margin
Because open positions move with market prices, unrealized P/L changes continuously, so equity and free margin also move continuously.
What counts as “used margin”
Used margin depends on how your broker calculates margin for your open orders. That calculation typically considers factors such as instrument price, position size, and the account’s leverage and margin requirements. Since broker calculations can differ, the exact numeric outcome for equity and free margin is best verified in your broker’s platform and account statements.
Example checks: how changes affect free margin
Imagine two traders with the same balance but different open positions.
- If one trader has open trades that are currently in profit, their unrealized P/L is positive, so equity is higher than balance and free margin increases (because used margin is unchanged until positions change).
- If open trades are in loss, unrealized P/L is negative, so equity falls, which reduces free margin.
Even if you do not add or close positions, free margin can still drop as prices move against your open trades, because used margin usually stays tied to the open positions while unrealized P/L shifts.
When limits start to matter
Most forex trading systems apply margin-related limitations when free margin becomes too low relative to open position requirements. The specific trigger and the resulting action (for example, restrictions or automatic position handling) depend on broker rules and account settings. So the practical risk is that declining free margin reduces room for error, and the account may face operational constraints if equity is not sufficient to cover margin requirements.
Relevant limitations and what you can verify
- No single universal formula guarantees identical numbers across brokers. The relationship is conceptually consistent, but the margin used calculation can vary by provider.
- Equity and free margin are not fixed. They change with market price movements that affect unrealized P/L.
- Platform displays are the best verification. Check the exact definitions shown in your trading terminal for “Equity,” “Used margin,” and “Free margin,” and confirm how they update with price changes.
- This explanation is informational only. It does not predict outcomes or assume your personal account conditions.