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Margin is one of the most misunderstood concepts in forex trading. Many traders have blown accounts simply because they did not understand how margin works. This guide explains margin, free margin, margin level, and margin calls in plain English.
Margin is not a fee or a cost. It is the collateral required to open a leveraged position. When your broker offers 100:1 leverage, you must put up 1% of the trade value as margin.
Example: You want to open 1 standard lot of EUR/USD (100,000 units). At 100:1 leverage, required margin = 100,000 ÷ 100 = $1,000. That $1,000 is locked up while your trade is open. It is still your money, but you cannot use it for other trades.
Used Margin: The total margin locked up by all your open positions. If you have three open positions each requiring $500 margin, your used margin is $1,500.
Free Margin: The money available to open new trades. Formula: Equity – Used Margin = Free Margin.
Example: Account balance = $10,000. Used margin = $2,000. Free margin = $8,000. You can open new trades using that $8,000.
Margin level = (Equity ÷ Used Margin) × 100
This percentage tells your broker how healthy your account is. Most brokers set thresholds:
You have $10,000 account. You open 5 standard lots of EUR/USD. Each standard lot requires $1,000 margin at 100:1 leverage. Used margin = $5,000. Free margin = $5,000. Margin level = (10,000 ÷ 5,000) × 100 = 200% – perfectly healthy.
Now the market moves against you. Your open loss is $4,000. Equity = $10,000 – $4,000 = $6,000. Used margin still $5,000. Free margin = $1,000. Margin level = (6,000 ÷ 5,000) × 100 = 120% – getting close.
Market moves against you another $1,000. Equity = $5,000. Used margin = $5,000. Free margin = $0. Margin level = 100% – you cannot open new trades.
Market moves against you another $2,000. Equity = $3,000. Used margin still $5,000 (but equity is less than used margin!). Margin level = (3,000 ÷ 5,000) × 100 = 60%. Your broker issues a margin call warning.
Market moves against you another $1,000. Equity = $2,000. Margin level = 40%. Your broker automatically closes positions to bring margin level back above 50%.
Use proper position sizing. The margin call scenario above happened because the trader used 5 standard lots on a $10,000 account – 50:1 effective leverage. That is gambling.
With proper position sizing using our pip calculator, margin calls become extremely rare.
Most brokers require higher margin for exotic pairs and lower margin for majors. Typical requirements:
Many beginners think: "I have $10,000 account, I can trade 5 standard lots because margin is only $5,000." This is dangerous. Margin is not your risk. Your stop loss defines your risk.
In the example above, a 100-pip loss on 5 standard lots of EUR/USD = $5,000 loss. That is 50% of the account. Margin was only $5,000, but the actual loss exceeded that.
Professional traders keep margin level above 300% at all times. That means free margin is at least double used margin.
Example: $10,000 account. Used margin maximum = $3,333 (to keep margin level at 300%). At 100:1 leverage, $3,333 margin equals 3.33 standard lots. With proper 1% risk per trade, you would never open that many lots anyway.
Our pip calculator focuses on risk, not margin. This is correct. Always size positions based on stop loss distance and 1% risk rule. If you follow the 1% rule, your margin usage will automatically be safe.
Only check margin when opening multiple correlated positions. If you have long positions on all 7 major USD pairs, your total margin exposure to a dollar move is extreme. Reduce position sizes accordingly.
Margin is a tool, not a target. Use it wisely and you will never experience a margin call.
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