Used margin vs. free margin
Used margin is the part of your account equity reserved to keep existing open positions active. In practice, it answers: “How much of my equity is currently committed by my trades?” Free margin answers the opposite question: “How much equity is still available for new positions or to absorb losses after commitments?”
A simple way to relate them is a basic accounting relationship:
- Free margin = Equity − Used margin
Assumption for the example: ignore transaction costs, funding, and any changing mark-to-market effects after the snapshot.
Example snapshot (numbers are illustrative):
- Equity: 10,000
- Used margin: 2,000
- Free margin: 8,000
If your open positions move against you, equity can drop. Because used margin is tied to the open positions (not their profit or loss in the usual way of the relationship), free margin typically shrinks as equity falls.
Material limitation / failure mode: the exact way “used margin” is computed can differ by provider and instrument (for example, handling of hedged exposure, contract specifications, or differing margin rates). Even if the relationship “free margin = equity − used margin” is conceptually useful, the underlying figures may vary.
Used margin vs. margin level
Margin level is usually described as a ratio that compares equity to margin usage. It answers: “How stressed is the account relative to the margin tied up?” A common form is:
- Margin level = (Equity ÷ Used margin) × 100%
Conceptually, margin level turns absolute numbers (equity and used margin) into a percentage-like stress indicator. Two accounts can have the same used margin but different equity, so their margin levels differ.
Example (illustrative):
- Account A: equity 10,000; used margin 2,000 → margin level 500%
- Account B: equity 6,000; used margin 2,000 → margin level 300%
Both have the same “commitment,” but B has less buffer. If losses continue, margin level can fall, making it more likely that the provider enforces protective actions.
Material limitation / failure mode: “margin level” may not map one-to-one to any single protective threshold in every jurisdiction or broker setup. Different providers may reference different denominators (for example, required margin vs. used margin), or apply additional buffers and rules.
Used margin vs. required margin and margin requirement
Margin requirement is the baseline amount of funds a provider expects you to post for potential exposure under the product’s rules. Used margin is what is actually taken from your account for your current open positions under those rules.
So the key distinction is baseline vs. active allocation:
- Margin requirement: the rule-defined amount needed for exposure.
- Used margin: the portion of your account equity currently committed because of your open positions.
In many setups, used margin effectively reflects the margin requirement for the positions you currently hold, but terms are not always used consistently across all platforms. To avoid confusion, focus on what each number represents at the moment you look at your account:
- “What amount is tied up by positions right now?” → used margin.
- “What is the provider’s required baseline for that exposure category?” → margin requirement.
Assumption for calculations: assume a provider uses the same margin basis for “required” and “used” for those positions.
Material limitation / failure mode: if a provider’s system uses different logic for hedging, partial closing, or instrument-specific margin rates, required margin and used margin may appear similar but can diverge in edge cases.
Used margin vs. leverage
Leverage is not a currency amount by itself; it is a relationship between controlled position size (exposure) and the margin funds you post. Leverage is usually expressed like “1:10” or “10x,” indicating that you control a larger notional position with a smaller margin deposit.
Used margin is the outcome of applying leverage rules plus the instrument’s margin requirement to your current positions.
Think of it as:
- Leverage: “How much exposure you can control per unit of margin.”
- Used margin: “How much margin is actually occupied for your open exposure.”
Material limitation / failure mode: leverage does not remove market risk. Higher leverage can lead to larger exposure for the same used margin, which can make equity drop faster during adverse moves. Also, the provider may cap leverage differently per instrument, account type, or market condition.
Used margin vs. equity and unrealized P&L
Used margin is distinct from profit and loss. Equity typically includes both:
- Your cash balance and any realized results, plus
- Unrealized profit or loss on open positions (mark-to-market)
Unrealized P&L can change every time prices change, while used margin is tied to the position’s size and provider margin rates. That separation matters for understanding why free margin can decline even if the used margin amount does not jump in the same way.
Example (illustrative):
- You have equity 10,000 made up of cash 8,000 plus unrealized +2,000.
- Used margin is 2,000.
- Free margin is 8,000.
If unrealized P&L turns to −2,000 while used margin remains 2,000, equity becomes 6,000 and free margin becomes 4,000.
Key limitations and risks (what can break the mental model)
- Provider-specific computation and wording: “used margin,” “required margin,” and “margin” labels may differ between platforms. Even without changing your trades, the displayed numbers can follow provider rules.
- Market-driven equity movement: unrealized P&L moves with price, so any ratio using equity (such as margin level) can change rapidly.
- Regulatory and jurisdiction effects: some environments impose additional constraints or different margin treatment, so the same position can behave differently depending on where the account operates.
- Costs and execution effects: spreads, commissions, and funding/rollover can affect equity, which indirectly affects free margin and any margin ratios.
- Edge cases: hedging treatment, partial close behavior, and corporate/instrument events can create situations where accounting relationships appear non-intuitive.
How to verify the differences independently
A reader can verify these concepts without relying on predictions by checking the account statement fields and the platform’s margin definitions:
- Look for labels that explicitly define Equity, Used margin, Free margin, Margin level, and whether the platform uses Used margin or Required margin in its ratio. - Cross-check relationships using your own snapshot numbers. For instance, if the platform claims free margin is calculated from equity and used margin, test whether Free margin ≈ Equity − Used margin matches the displayed values closely.