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

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











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