top of page

Free margin in trading: friend or foe? All you need to know

Writer's picture: Smart Trading IndicatorsSmart Trading Indicators

We have all sinned by miscalculating our margin at some point.


What's more, we dare to say that the truth is something that never stops happening, but rather we become better and better and it happens much less. But it is always a challenge.


Margin is a fundamental concept in trading that refers to the amount of capital you must have available in your account to open and maintain positions.

Free margin, on the other hand, is the amount of capital that remains available after positions have been opened.


Today we are going to talk about how it helps us to properly manage risk and avoid margin calls and stop-outs.


What is free margin in trading?


The capital we have available to open new positions or to maintain existing positions. You calculate it by subtracting the margin used from the capital available in your account.


For example, if you have $10,000 in your account and you have used $2,000 as margin to open a position, your free margin would be $8,000.This must be taken into account, because it affects our ability to open and maintain positions.


If the free margin falls below the required level, it may result in a margin call or stop-out and that means that open positions will be automatically closed to avoid further losses… or to avoid making money on specific opportunities.


A stop-out occurs when all open positions are automatically closed due to a lack of available funds in the account.


What is the relationship between free margin and leverage?


Leverage is another important concept in trading which refers to the amount of borrowed capital that a trader uses to open positions. It may increase the potential benefits but it also increases the risks.

It is a double-edged sword.It directly affects the used margin and the free margin. The higher the leverage used, the higher the margin used and the lower the free margin.


What happens if the free margin falls below the required level?


If the free margin falls below the required level, it may result in a margin call or stop-out. A margin call occurs when the funds available in the account are insufficient to cover potential losses on open positions.


In this case, the trader will be asked to add more funds to their account or will close some or all of their open positions automatically until an adequate level of available capital is reestablished.


How can you increase free margin in trading?

There are several strategies you can use to increase your free margin:


1) Reduce the amount of leverage used: This can reduce the size of the trade and decrease the amount of capital needed as collateral.


2) Close some positions: This way you free up additional capital and increase the level of free margin.


3) Add more funds to the account: It directly increases the level of available capital and will increase the level of free margin. Be careful not to fall into meaningless excesses. A high free margin can also mean that too much capital is sitting idle and not being used effectively.


Various pro-tips


  • Set clear limits on how much leverage to use and how much capital to hold as additional collateral.

  • Don't stop monitoring. Use professional tools that will allow you to monitor 24 hours a day, 365 days a year, with personalized signals and an algorithm that learns from you and works better and better the more you use it.ç

  • Never forget the maximum amount you are willing to spend. Don't go into debt if it's not extremely necessary.

  • If you have several open positions, you will have to spread the risk among all those simultaneous operations. Personalize each case and possible solutions to problems.



In essence, free margin is a perfectly valid alternative to keep risk under control at all times.

Tell us if you have ever used it and how it went. We are waiting for you in the comments.





See you soon, trader!










REFERENCES

For this article, prompts have been used to request information

interpreted and provided by AI (Google Bard). Written and edited

by Kevin David Terán and verified by Pedro Arizaleta and Erwin Sánchez

Cover image by Freepik











0 comments

Comments


Smart Trading Indicators Support team

Our support team
is always there for you.

ISO Smart trading indicators AI Logo

© 2023 by Smart Trading Indicators. All rights reserved.

  • Telegram
  • Instagram
  • X
  • Youtube
  • Facebook
  • TikTok

Trading in financial markets is inherently risky, and a significant number of traders end up losing money. The contents and services provided by SMART TRADING INDICATORS LLC are designed for informational and educational purposes only. The material should be viewed as hypothetical and used primarily to demonstrate our product. It is not intended to serve as financial advice. Decisions regarding buying, selling, holding, or trading in securities, commodities, and other investments carry inherent risks. Such decisions should ideally be made based on the advice of qualified financial professionals. Remember, past performance is not indicative of future results.

​

Hypothetical or simulated performance results have certain intrinsic limitations. Unlike actual performance records, simulated results do not represent real trading. Additionally, since the trades have not actually been executed, the results may have under-or-over compensated for certain market factors, such as a lack of liquidity. Simulated trading programs are generally also developed with the benefit of hindsight. We make no claim that any account will or is likely to achieve profits or losses similar to those shown in our materials.

​

The testimonials presented on our website are individual experiences of clients who have used our services. They are not indicative of future performance or success and may not reflect the experience of all our clients.

 

As a provider of technical analysis tools and services for charting platforms, SMART TRADING INDICATORS LLC does not have access to personal trading accounts or brokerage statements of our customers. Consequently, we cannot confirm whether our customers fare better or worse than the general trading population based on our products.

​

Our charts are provided by TradingView, upon which our tools are built. TradingView® is a registered trademark of TradingView, Inc. (www.TradingView.com). TradingView® is not affiliated with SMART TRADING INDICATORS LLC.

​

This statement is a summary and does not represent our full Disclaimer. We strongly encourage you to read our full disclaimer for a comprehensive understanding of the risks involved in trading and the use of our products.

​

Our services may include tools and analytics powered by OpenAI technology. It's important to understand that while these tools use advanced AI algorithms, they do not guarantee trading success and should be used as part of a broader trading strategy.

​

Additionally, our community and services may be accessible through Telegram. Participation in our Telegram channels or groups should be viewed as a platform for sharing information and ideas. It does not constitute a recommendation for trading decisions.

​

Always approach trading with caution and consider seeking advice from financial professionals. Our goal is to provide tools and resources to aid in your trading decisions, not to replace diligent market research and professional advice.

bottom of page