Free margin is the amount of money in your trading account that is not currently tied up in open positions and remains available to open new trades. It is calculated by subtracting the used margin (funds locked as collateral for existing trades) from your total equity (balance plus or minus unrealized profits and losses).
As your open positions gain or lose value, your free margin fluctuates accordingly. Used margin represents the capital currently locked in your open trading positions, making it unavailable for new trades. When free margin drops to zero or negative, you risk a margin call, where your broker may close positions to protect against further losses. Think of free margin as your financial cushion—it shows how much breathing room you have before running into trouble. The forex market operates 24 hours a day, five and a half days per week, causing your free margin to change continuously as currency prices move, even overnight. Understanding free margin is essential for managing leveraged positions effectively and avoiding unnecessary trading risks.
In short: Free margin is your available trading capital after accounting for funds locked in open positions.
Example in Action
A South African trader deposits R10,000 into their forex account and opens a USD/ZAR position that requires R2,000 as used margin. Their free margin is R8,000 (R10,000 equity minus R2,000 used margin), which represents the available funds they can use to open additional trades.
If the USD/ZAR trade moves in their favor and generates R1,500 profit, their equity rises to R11,500 while the used margin stays at R2,000, increasing their free margin to R9,500.
If instead the trade loses R3,000, their equity drops to R7,000 and their free margin shrinks to R5,000, limiting their ability to open new positions. Should the losses continue and free margin approach zero, the trader would face a margin call requiring additional funds to maintain the position. When account equity falls below the broker's required margin levels, this triggers a warning that could lead to forced position closures if not addressed promptly. The broker may automatically close positions to prevent further losses and protect both parties from negative account balances.
Why It Matters
Understanding how free margin works is one thing.
Grasping why it matters separates surviving traders from blown accounts across Africa. Free margin determines trading flexibility, controls position sizing, and acts as the only buffer against margin calls that liquidate positions without warning. It's the difference between withstanding market volatility and watching a broker automatically close trades.
Risk management hinges entirely on maintaining adequate free margin levels.
Common Questions
How Does Free Margin Change When Trading Exotic African Currency Pairs?
Free margin fluctuates rapidly with exotic African pairs due to higher volatility, wider spreads, and sudden price swings. Market gaps, low liquidity, and economic instability across the continent can quickly erode available margin, increasing margin call risk for traders.
Can Low Free Margin Trigger Automatic Position Closure by African Brokers?
Yes, low free margin can trigger automatic position closure. African brokers typically initiate stop-out when margin level drops to 50% or lower, liquidating positions automatically to prevent negative account balances and protect both trader and broker.
Does Free Margin Calculation Differ Between CFA Franc and Other African Currencies?
No, free margin calculation remains identical across CFA franc and other African currencies. The universal formula—Equity minus Used Margin—applies regardless of currency denomination. However, exchange rate fluctuations between currencies affect the actual margin values displayed in traders' accounts.
What Free Margin Percentage Do Nigerian Brokers Typically Recommend Maintaining?
Nigerian brokers typically recommend maintaining free margin above 50% to avoid margin calls, with many suggesting 100% or higher during volatile periods. This buffer protects traders from forced liquidation when using the high leverage commonly available in Nigeria.
How Do South African Capital Controls Affect Free Margin Requirements?
South African exchange controls don't directly mandate specific free margin percentages, but capital export restrictions limit funding flexibility for traders. Brokers may require higher margin buffers since moving additional capital offshore requires SARB approval above regulatory thresholds.
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