# Margin and Free Margin Explained for Beginners

> Margin and free margin determine whether you can open new trades and whether you are at risk of a margin call. Here is a clear explanation of both.

**Tags:** margin, free-margin, forex, beginners, money-management
**URL:** https://traderjournal.app/money-management/margin-and-free-margin-explained-beginners

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# Margin and Free Margin Explained for Beginners

Margin is one of the least understood concepts by beginning forex traders, despite appearing prominently in the MT4/MT5 trade terminal at all times. Here is a clear, practical explanation.

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## What Is Margin

Margin is a deposit that your broker holds as collateral when you open a leveraged position. It is not a fee or a cost - the margin is returned to your account (minus any P&L) when you close the trade.

Think of margin as a security deposit. When you rent an apartment, you give a deposit that you get back when you leave (assuming no damage). Margin works similarly - it is held temporarily, not spent.

**Margin calculation:**

Margin required = Position value / Leverage ratio

On a 100:1 leverage account, trading 1 standard lot of EURUSD:
Position value = $100,000
Margin required = $100,000 / 100 = $1,000

That $1,000 is locked as collateral while the trade is open.

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## What Is Free Margin

Free margin is the portion of your account equity that is not currently allocated as margin. It is the money available to open new trades.

Free margin = Equity - Used margin

Where equity = balance + floating P&L from open trades.

**Example:**

Account balance: $10,000
Open trade requiring $1,000 margin
Floating P&L on that trade: +$200

Equity = $10,000 + $200 = $10,200
Used margin = $1,000
Free margin = $10,200 - $1,000 = $9,200

You have $9,200 available to open additional trades.

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## The Margin Level Percentage

MT4 and MT5 display a Margin Level percentage in the trade terminal:

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

In the example above: ($10,200 / $1,000) x 100% = 1,020%

A high margin level means you have plenty of buffer. A falling margin level means your equity is shrinking relative to your open positions.

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## The Margin Call and Stop Out

Two critical thresholds:

**Margin call level** (typically 100%): When your margin level falls to this point, you may receive a notification from the broker. Some brokers automatically close positions at this level.

**Stop out level** (typically 50%): If your margin level falls to 50%, MT4/MT5 automatically starts closing your losing positions (largest first) until the margin level rises above the stop out threshold.

Reaching a stop out means the market has moved so far against your open positions that your broker closes them to prevent your account from going negative. This is the event that retail traders refer to as getting "margin called."

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## How to Avoid Margin Problems

**Keep free margin well above zero.** A simple rule: never let free margin fall below 30-50% of your account equity. If you are approaching that level, close some positions before the market does it for you.

**Do not over-open positions.** Each new open position reduces free margin. Running many simultaneous positions on a small account can push margin level dangerously low even if each individual trade is sized conservatively.

**Monitor during high-volatility periods.** News events can move prices quickly and dramatically. Having 5 positions open during NFP or a central bank announcement can push your margin level into danger faster than you can react.

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Your open positions' current equity is reflected in Trader Journal's Open Positions tab via the equity snapshot from the EA sync.

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