what is free margin level in forex

In forex trading, the free margin level is a measure that indicates the ratio of the trader's available free margin to the equity in the trading account. It is expressed as a percentage and is calculated using the following formula:

Free Margin Level=

(Free MarginEquity)×100Free Margin Level=(EquityFree Margin​)×100

Here are the key terms involved in this formula:

1. Free Margin:

   • Free margin represents the amount of funds in the trading account that is available for opening new positions. It is calculated as the difference between the equity and the used margin:

Free Margin=Equity−Used MarginFree Margin=Equity−Used Margin

• Equity is the current account balance plus or minus any unrealized profits or losses from open positions.

• Used Margin is the amount of money reserved by the broker to maintain open positions.

1. Equity:

   • Equity is the total value of the trading account, including the initial capital, profits, and losses from open positions.

2. Free Margin Level:

   • The free margin level is expressed as a percentage and is calculated by dividing the free margin by the equity and then multiplying by 100.

Free Margin Level=(Free MarginEquity)×100Free Margin Level=(EquityFree Margin​)×100

Interpretation of Free Margin Level:

The free margin level provides traders with information about the health and risk exposure of their trading accounts. Here's how to interpret different levels:

1. High Free Margin Level (e.g., 100% or above):

   • Indicates a healthy account with a substantial buffer of available funds (free margin) relative to the equity. Traders with a high free margin level have more flexibility to open new positions or withstand adverse market movements.

2. Normal Free Margin Level (e.g., 50% to 100%):

   • Generally considered acceptable, suggesting a reasonable amount of available margin compared to the equity.

3. Low Free Margin Level (below 50%):

   • May indicate increased risk as the free margin is getting closer to the equity. Traders in this situation should consider managing positions, reducing exposure, or depositing additional funds.

4. Zero or Negative Free Margin Level:

   • Indicates that the equity is not sufficient to cover the used margin. In such cases, traders may face a margin call or automatic closure of positions by the broker.

Traders should regularly monitor their free margin level to make informed decisions about position sizes, leverage, and overall risk management. A healthy free margin level is crucial for avoiding margin calls and sustaining long-term trading success.