Apiary Fund Blog

Margin and Free Margin: Using them to your leverage in trading

[fa icon="calendar"] Apr 6, 2018 2:59:05 PM / by Lukas MacMacKen

Margin and Free Margin are standard FOREX jargon you'll hear thrown around. But what do they mean and how do they effect you? Lets start with your leverage:

Leverage

The leverage is sort of like "financial help" with your trade to let you trade more. With the leverage, you're "borrowing" money, theoretically, from your broker. Apiary Fund can leverage your account up to 100:1. With 100:1 leverage, to place a trade that is 1 full lot, or $100,000 of what you're trading, you only use $1,000 of your account balance. If you're leveraged 20:1, you use $5,000 from your account. The leverage will play a significant role in your Margin and Free Margin.

Equity

Equity is another aspect that will be important in calculating your margin and free margin. Your equity is your account balance plus the sum of all your open trades profit. If you have no open trades, your equity and balance will be equal. If you have open orders you will see your equity fluctuate with the market.

 

Margin (required margin)

Your margin is what you're spending on your part of the pair. Your margin, also, cannot exceed your account balance. It is calculated based on your account leverage and the difference between the margin and the dollar amount of how many lots you traded is how much money you're using in leverage, which is why the leverage plays such a big role. In Alveo, your margin can be found on the very bottom bar next to the clock. The calculation for margin will look at the price of the pair you're trading, lot size and leverage. So for example, lets say we're trading the EUR/USD and the current price is 1.22847. This means each Euro you buy will cost you 1.22847 dollars. If we're buying one lot, we're saying we want to buy 100,000 Euros, which with a non leveraged account, costs us $122,847. This is our required margin. Now of course, if we're trading a leveraged account, our required margin is a fraction of that since we're only putting forth a fraction of the cost.

 

Free Margin

When you have no open trades, your free margin will be the same as your account balance. The quick calculation for your free margin is: Free Margin = Equity-(required margin of all open trades). As the market moves and your trades make more (hopefully) or lose more for you, your free margin will move as well. This is since the required margin won't change after the trade is placed, yet the equity is constantly changing with these positions. One reason this is incredibly important to monitor is on leveraged accounts, you can lose more money than you put into your account. Imagine placing a trade before bed with a brand new $1,000 you just invested in waking up to a call from your broker saying you owe them $300. Not the wake up call you were probably hoping for with your new found love (or now hatred) of trading. One thing Apiary does to prevent these types of occurrence, is once your free margin hits $0, Alveo will close all your trades. That way, you free up all that margin, and can trade again without your account balance being negative.

Topics: Broker, Forex, Margin, free margin, leverage

Lukas MacMacKen

Written by Lukas MacMacKen

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