What Are Free Margin, Used Margin, and Equity?

Beginner

Jun 06, 2025

Understand Free Margin, Used Margin, and Equity in Forex trading. Learn how to manage your account wisely and avoid the risk of Stop Out.

Understanding the Components of Margin in Forex Trading

Margin is a portion of your capital that a broker requires you to have in your account in order to open and maintain trading positions. If you don’t have enough margin, you won’t be able to open new positions, and your existing trades may be automatically closed (known as a Stop Out).

Margin isn’t just a single number. It consists of three key components: Free Margin, Used Margin, and Equity — all of which we’ll break down in the following sections.

What Is Equity?

Equity refers to the real-time total value of your trading account. It includes both your account balance (Balance) and any unrealized profit or loss (Floating P/L) from currently open positions.

The formula for equity is : $Eq u i t y = B a l an ce + Fl o a t in g P / L$

Examples of How Profit/Loss Affects Equity:

When your trade is in profit:
Suppose your Balance is 1,000 USD and you have an open position with an unrealized profit of 50 USD.
Your Equity would then be 1,050 USD.
When your trade is in loss:
Suppose your Balance is 1,000 USD and you have an open position with an unrealized loss of 100 USD.
Your Equity would then be 900 USD.

Equity is one of the most important figures for assessing the health of your trading account, as it reflects the actual net value of the funds you currently hold.

Equity Affects Margin Level and Stop Out

Equity is a key component in calculating your Margin Level, which is the ratio between your Equity and Used Margin:

Margin Level = (Equity / Used Margin) × 100%

If your Equity drops significantly, your Margin Level may fall below the broker’s required threshold—typically around 100%. When this happens, you may receive a Margin Call. If your Equity continues to decrease and the Margin Level reaches the Stop Out level, your open positions will be automatically closed by the broker to prevent your account from falling into a negative balance.

What Is Used Margin?

Used Margin refers to the portion of your funds that is locked as collateral for all currently open positions. When you open a trade—whether it’s a Buy or Sell order—your broker sets aside a specific amount from your account. This reserved amount is the Used Margin. It is the capital already committed to keeping your positions open.

Higher Leverage Means Lower Used Margin per Trade

There is an inverse relationship between Leverage and Used Margin. The higher the leverage you use, the less margin is required to open each position. This means you can control larger trade sizes while using a smaller portion of your actual funds.

For example, using 1:100 leverage requires only 1% of the total trade value as margin. In contrast, 1:20 leverage would require 5% margin for the same position size. With higher leverage, your capital stretches further—allowing for greater exposure with less upfront commitment.

However, while higher leverage increases the potential for higher returns, it also magnifies risk. It’s a powerful tool for capital efficiency, but it should always be used with caution and proper planning. Effective risk management is essential to withstand market volatility and to avoid unnecessary losses.

(This example assumes a trade of 1 Standard Lot of EUR/USD at a price of 1.0000, where 1 Standard Lot = 100,000 units)

Used Margin indicates how much of your capital is currently tied up in open positions. If your Used Margin is high, it means a large portion of your account balance has already been allocated to active trades—leaving you with less Free Margin available to open new positions or absorb market fluctuations. ¹

Related Article: How to Calculate Margin Before Opening a Trade

Even though opening multiple trades at once may seem like a way to diversify opportunities, in reality, if you don’t manage your Used Margin carefully, you could be exposing yourself to risk without realizing it. The more margin you use, the less Free Margin you’ll have to absorb market volatility—and if the market moves against you, your positions may be closed prematurely.

Investing isn’t just about opening as many trades as possible—it’s about allocating capital efficiently.
Learning how to calculate and monitor your Used Margin regularly will help you trade with discipline and reduce the risk of facing a Margin Call or Stop Out over the long term.

IUX is designed to help you manage your portfolio in a structured way, with features that let you view your Used Margin and Free Margin in real time—so you can plan your trades with greater precision.
Whether you're trading Forex, indices, or gold, IUX is the tool built to support your every move in the market.

Start building your investment portfolio with IUX today and learn how to manage margin like a pro—on a platform that truly understands traders at every level.

What Is Free Margin?

Free Margin refers to the portion of your funds that is not currently being used to maintain open positions—in simple terms, it’s the available money in your account that hasn’t been locked as margin. This is the amount you can use to open new trades or serve as a buffer against potential losses from existing positions.

Formula: Free Margin = Equity − Used Margin

Example Scenario:

Suppose your Equity is 1,000 USD and your Used Margin is 200 USD (from existing trades).
That means your Free Margin is 800 USD—this is the amount you can use to open additional trades or keep as reserve in case your current positions start to incur losses.

Free Margin is a direct indicator of your account’s flexibility and health. The more Free Margin you have, the better positioned you are to handle market fluctuations or to take advantage of new trading opportunities.

FAQ: Frequently Asked Questions

Q1: What’s the difference between Equity and Balance?

A: Balance is the amount of money in your trading account excluding any profit or loss from open trades. Think of it as your “cash on hand” before you start trading.
Equity, on the other hand, is the real-time total value of your account, which includes your Balance plus or minus any unrealized profit or loss from currently open positions.

In simple terms, Balance remains static until you close a trade or deposit/withdraw funds, while Equity fluctuates constantly with market movements.

Q2: Is low Free Margin dangerous?

A: Yes, it can be very risky. Low Free Margin means you have very little available capital left to absorb potential losses.
If your open trades continue to go into loss, your Free Margin will decrease quickly—potentially triggering a Margin Call, and if it continues to fall, a Stop Out.

Once your Free Margin approaches zero, your account becomes highly vulnerable to automatic position closures by the broker to prevent negative balance.

Q3: Can Equity go negative?

A: In most cases, no. Most Forex brokers today offer Negative Balance Protection, which means they will absorb any loss that pushes your account below zero.
This protection ensures your Equity cannot fall below zero.

However, during extreme market volatility—such as major news events or unexpected global events—the system might not react in time. In rare cases, your Equity could go slightly negative, but such scenarios are uncommon and usually short-lived.

Understanding the Relationship Between Free Margin, Used Margin, and Equity

As a trader, there are three key numbers you should monitor closely: Free Margin, Used Margin, and Equity. These figures are directly related to one another, and understanding how they work together is essential for maintaining a healthy trading account.

Core Formula to Remember:

Equity = Used Margin + Free Margin

This means your Equity—the total real-time value of your account—is divided into two parts:

Used Margin is the portion of funds currently locked as collateral for your open trades.
Free Margin is the remaining available capital that can either be used to open new trades or act as a buffer to absorb potential losses.

Monitoring your Margin Level is equally important. It helps you assess your account’s risk exposure at any given time. A low Margin Level may indicate that your available funds are running low and your trades are approaching dangerous territory—potentially leading to a Margin Call or even a Stop Out.

Managing your Free Margin, Used Margin, and Equity with discipline—and understanding the role each plays—can significantly improve your ability to trade with confidence and reduce the risk of your positions being forcibly closed.

Note: This article is intended for preliminary educational purposes only and is not intended to provide investment guidance. Investors should conduct further research before making investment decisions.