What Is Free Margin in Trading?

Free margin is the portion of your account equity that remains available after the required margin for your open positions has been set aside. It acts as a financial buffer, helping absorb unrealised losses and determining whether you have enough available funds to open additional trades.

As market prices change, your free margin rises and falls with your account equity. If it becomes too low, you may be unable to open new positions and could eventually face a margin call or an automatic stop-out.

Quick Takeaways

• Free margin equals your account equity minus the margin used to maintain open positions.
• Unrealised profits increase free margin, while unrealised losses reduce it.
• Overnight financing charges and wider spreads can reduce free margin, even when prices move very little.
• Low free margin increases the risk of a margin call or an automatic stop-out.

What Does Free Margin Mean?

Once the required margin for your open positions has been set aside, the remaining equity becomes your free margin.

Think of it as the financial cushion within your trading account. It helps absorb unrealised losses as markets move and determines whether you have enough available funds to open additional positions.

To understand how free margin works, it also helps to know the difference between three key account figures.

• Account balance is the amount of money in your account after all closed trades, deposits and withdrawals have been recorded.
• Equity is your account balance adjusted for any unrealised profits or losses from open positions.
• Used margin is the amount your broker reserves to keep those positions open.

Because equity changes whenever the value of your open positions changes, this available buffer also fluctuates throughout the trading day. Profitable positions increase your available free margin, while losing positions reduce it.

How Does Free Margin Work?

This buffer changes automatically as the value of your open positions changes.

When your trades make an unrealised profit, your account equity increases, leaving more free margin available. If your trades move into a loss, your equity falls and your free margin decreases. In short, free margin rises and falls alongside your account equity.

The example below shows how this works.

Suppose you deposit £1,000 into a trading account. Before opening any positions, your account balance and equity are both £1,000, so your free margin is also £1,000.

You then open a CFD position that requires £200 in margin. Your broker sets this amount aside to maintain the position, leaving £800 of free margin.

If the trade later shows an unrealised profit of £150, your equity increases to £1,150. Because the required margin remains £200, your free margin also increases to £950.

If the market moves against you instead and the trade records an unrealised loss of £300, your equity falls to £700. With the required margin unchanged, your free margin decreases to £500.

This example illustrates why traders monitor free margin throughout the life of a trade. The larger the buffer, the more room the account has to absorb normal market fluctuations before approaching the broker's margin requirements.

Can You Withdraw Free Margin?

In many cases, yes. However, free margin should not automatically be viewed as spare cash.

Withdrawing funds reduces both your account balance and your equity. If you still have open positions, this also reduces the buffer available to absorb future losses.

Most brokers allow withdrawals provided enough funds remain to satisfy their margin requirements. Before withdrawing money, it is worth considering whether your remaining free margin will still be sufficient if the market moves against your open positions.

How Is Free Margin Calculated?

Free margin is calculated by subtracting the margin required for your open positions from your account equity.

Free Margin = Equity - Used Margin

Although the formula is straightforward, the result changes continuously because your equity changes whenever the value of your open positions changes.

For example, if your account equity is £2,000 and your used margin is £500, your free margin is £1,500.

If your open positions generate an unrealised profit, your equity increases and your free margin grows. If they move into a loss, your equity falls and your available free margin decreases.

For this reason, free margin is a live figure that updates throughout the trading day rather than a fixed account balance.

What Affects Free Margin?

Market movements have the biggest impact on free margin, but they are not the only factor. Trading costs and changes in market conditions can also reduce the amount of equity available in your account.

Market Movements

Every price movement in an open position affects your account equity.

When a trade moves into profit, your equity increases and your free margin expands. When it moves into a loss, your equity falls and your free margin shrinks.

The larger your unrealised profit or loss, the greater the change in your available free margin.

Overnight Financing Charges

Holding a leveraged CFD position overnight may result in an overnight financing charge or, in some cases, an overnight credit.

These adjustments are applied to your account and directly affect your equity. If an overnight charge is deducted, your free margin also falls.

This is one reason why understanding what is leverage in trading is important. Leverage allows you to control a larger position with a smaller initial outlay, but it can also increase financing costs when positions are held for longer periods.

Spread Widening

The spread is the difference between the bid and ask prices.

During periods of high volatility or reduced liquidity, brokers may widen the spread. This commonly occurs around major economic announcements, market rollovers and other periods of increased uncertainty.

A wider spread increases the unrealised loss on an open position, reducing both your equity and your free margin. If your available buffer is already small, spread widening alone may bring your account closer to the broker's margin requirements.

Free Margin vs Margin Level

Free margin and margin level are related, but they measure different aspects of your trading account.

Free margin is the amount of equity that remains available after the required margin has been set aside. Margin level, on the other hand, measures the relationship between your account equity and the margin currently being used.

It is calculated using the following formula:

Margin Level = (Equity ÷ Used Margin) × 100

For example, if your account has £1,000 in equity and £200 in used margin, your margin level is 500%.

As your equity falls, both your free margin and your margin level decrease. The lower these figures become, the less capacity your account has to absorb further losses.

When your free margin reaches zero, your equity equals your used margin, resulting in a margin level of 100%.

At this point, some brokers may prevent you from opening new positions or issue a warning that your account is approaching its margin limit. However, this does not necessarily mean your existing positions will be closed immediately. Margin policies vary between brokers, account types and regulatory jurisdictions.

What Happens during a Margin Call?

A margin call occurs when your account no longer meets your broker's minimum margin requirement.

Traditionally, a margin call involved the broker asking the trader to deposit additional funds or reduce their exposure. Today, many trading platforms issue automated notifications instead, while some brokers simply restrict new positions once the required margin level has been reached.

Understanding what is a margin call is important because it is not the same as a stop-out.

A margin call is a warning that your available equity is becoming insufficient to support your open positions. A stop-out occurs later if your account reaches the broker's close-out level. At that point, the broker may automatically close one or more positions to reduce the risk of further losses.

For retail CFD accounts regulated in the UK, FCA (Financial Conduct Authority) rules require providers to begin closing positions when the funds in a client's CFD account fall to 50% of the total margin required to maintain all open CFD positions.

However, brokers may issue margin-call warnings before this threshold is reached. The exact warning level, close-out policy and order in which positions are closed vary between providers, so it is always worth checking your broker's terms before trading.

Common Free Margin Mistakes

Free margin is designed to protect your account against normal market movements. However, many traders only pay attention to it when it is already running low.

Here are three common mistakes that can increase the risk of a margin call or automatic stop-out.

Traders sometimes let overconfidence or the fear of missing out push them to use almost all of their free margin at once - a behavioural bias worth watching for, since it removes the very buffer designed to protect you.

Using Almost All Your Free Margin

One of the most common mistakes is treating free margin as buying power rather than a risk buffer.

For example, if your account shows £1,000 of free margin, you might be tempted to use most of it to open additional positions. While this increases your market exposure, it also leaves very little room for normal price fluctuations.

Even a relatively small adverse move could reduce your equity significantly and bring your account closer to your broker's margin requirements.

Ignoring Overnight and Weekend Risk

Markets do not always move gradually.

Major news, central bank announcements or geopolitical events can cause prices to gap when markets reopen after the weekend or a trading session ends.

If your account has only a small free-margin buffer, these sudden price movements may reduce your equity much faster than expected, increasing the risk of a margin call or stop-out.

Withdrawing Free Margin Too Early

Although many brokers allow withdrawals while positions remain open, withdrawing available funds reduces your account equity.

This leaves less room to absorb future losses if the market moves against you. Before making a withdrawal, consider whether your remaining free margin is sufficient to support your open positions.

Why Is Free Margin Important?

Free margin is one of the simplest indicators of your account's financial health.

It shows how much equity remains available after the margin for your open positions has been set aside. The larger this buffer, the more room your account has to absorb normal market fluctuations before reaching your broker's margin requirements.

Monitoring your free margin alongside your equity, margin level and overall position size can help you manage risk more effectively and make better-informed trading decisions.

Conclusion

Free margin is the portion of your account equity that remains available after the required margin for your open positions has been set aside. While it can be used to open additional trades, its primary purpose is to provide a buffer against adverse market movements.

As your equity changes, your free margin changes with it. Understanding how free margin, margin level and account equity work together can help you manage leverage more effectively and reduce the likelihood of a margin call or automatic stop-out.