Margin can be either “used” or “free”, so let’s find out what it means and what’s the difference.
When you open a new position for margin trading, a specific amount of money is set aside and “locks up”. This specific amount of money is called the required margin. Each specific position has its own required margin that depends on margin requirements and position details.
And if you decide to sum up all of the required margins for all your positions, then you will find a used margin. So used margin means the total amount of funds that are “locked up” and can’t be used to open new positions. In general, used margin shows what amount of funds you need to keep all your trades open.
Required and used margin can be calculated in several ways, depending on whether we use leverage or not.
Required margin = Notional value * Margin requirement
Notional value usually refers to the number of lots that you specified for a position at the current price. Lot specifications differ depending on the asset. So notional value formula is:
Notional value = Price * Lots
Margin Requirement is usually expressed as a percentage of the “full position” and shows the amount of margin required to open a position. It also shows how much trade size is magnified with leverage. So if you need to have 2,000 USD on your balance to open a 100,000 USD trade, then the margin requirement is 2%. Looking at this example, you can also see that the 2% margin requirement is the same as 50x leverage (100,000/2,000).
Let’s say you want to open a position on the USDT/USD market. The price for 1 USDT is $1. 1 Lot equals 1 USDT and the margin requirement is 5% (20x leverage).
If you open a position 10,000 lots worth, then its notional value would be 10,000 USDT (1 * 10,000). In this case, the required margin is 500 USDT (10,000 x 0.05).
If you don’t have any other positions, then your used margin will also be 500 USDT. But if you decide to open another position with 100 USDT required margin, then your used margin will be 600 USDT (500 + 100).
Free margin is also known as usable margin and it refers to the equity that the trader hasn’t used for opening positions. Traders usually consider free margin either as the amount that is available to open new positions or as the amount that existing positions can move against you before margin call.
In most cases, the usable margin is calculated as the difference between equity and used margin.
Usable margin = Equity – Used Margin
Let’s say you have 1,000 USDT on your balance. You don’t have any trades open, so your equity equals balance and your usable margin is 1,000 USDT as well. Then you decide to open a position 600 USDT worth. These funds are taken out of your usable margin and moved to used margin to serve as collateral for the open position.
So your usable margin will be 400 USDT (1,000 – 600). You can use these funds to open some other positions or keep on your balance to cover potential unfavorable price movements.