The free margin in a Forex CFD broker is a crucial factor that has a significant impact on its profitability. It allows you to trade with leverage and take more risks without the need of investing additional capital. As a result, it creates more possibilities for you to make money.
In this article, we will teach you how to calculate free margins in Forex CFD brokers and the advantages of knowing these margins.
What is a Free Margin
The difference between the actual margin and the commission paid to your broker is referred to as the free margin in Forex CFD brokers. It is the difference between the amount of money you get and the amount of money you have to pay the broker.
As a rule, the free margin is not disclosed in the broker’s terms and conditions. The free margin is hidden from you as it can’t be determined by the broker until you analyze the results of your trades.
Before we go any further, it’s worth mentioning that there is no actual free margin in Forex. In practice, you’ll often see different indicators, such as 95% Gain, Profit Margin, and Limit Order Book, which you should understand when reading an explainer.
These indicators mean that your broker gives you a certain amount of leverage. They are used to calculate your profit/loss and the required amount of collateral to trade with. Larger numbers are better.
Of course, this is not the case. When it comes to trading with leverage, you don’t get any leverage. So what you are getting is a way to calculate your profit and gain. So the real margin is the amount of profit you need to cover losses.
The Importance of Free Margin
There are many advantages of using Forex CFD brokers to trade. The first advantage is the ability to take leveraged positions that help you use your capital in the most profitable way possible.
However, the free margin in a Forex CFD broker is a crucial factor that has a significant impact on its profitability. It allows you to trade with leverage and take more risks without the need of investing additional capital. As a result, it creates more possibilities for you to make money.
Leverage in a Forex CFD Broker
Leverage means how an investor takes additional risks to make profits. Using leverage also known as external sources of leverage in forex trading helps you to trade. But if you do it often, it will significantly increase your losses.
How to Calculate the Free Margin in CFD Brokers
To calculate the free margin, you will need to divide the profit/loss of the trade by the trade commission cost in dollars.
This is different from other trading strategies, which include any sum of the funds cost divided by the trading amount. However, as the profit/loss is usually less than 0.1% of the amount of trading, you usually want to use the same principle for calculating the free margin.
By dividing the profit/loss with the trade commission cost, you will obtain the amount of free margin you have in a trade.
Why is the Free Margin Important in Forex
To have a free margin, you have to invest in a Forex broker with high leverage. Therefore, it will be difficult to reach a profit for the clients without using leverage.
Other Factors That Affect the Free Margin
Expert traders usually get a higher profit on trading. Hence, it is often easier for traders to see the profit in Forex. It helps them in making a profit by following their trading rules. The freedom to trade without the requirement of an account to be able to enter the trade. As well, it minimizes the risk of losing all the profit you have invested in the CFD contract.
Another factor that increases the profitability of a trader is the difference in the different currency pairs (futures). Different pairs of currency pairs like EUR/GBP and EUR/USD are expected to trade at different levels than the other pairs. This is why different brokers offer variations of the contracts in which they offer leverage. It is because the cost of these leverage items varies.
Advantages of Knowing Your Free Margin
To understand how a Forex CFD broker calculates free margin, you need to understand the rules they follow when you execute a trade. The profit you earn is the amount minus the amount you have to pay to the broker. This implies that the bigger your portfolio is, the bigger the impact is on the amount you pay.
With the help of this concept, you will easily be able to calculate the potential return you stand to make after trading with the broker. However, before that, it’s important to know the minimum amount of leverage you can use in a Forex trading account.
The Risks of Free Margin
The key advantages of free margin trading are unlimited leverage, low minimum trade sizes, and maximum level of daily profit that can be obtained.
However, this doesn’t mean that the disadvantages of free margin trading are non-existent. Free margin trading carries with it several risks. First of all, it increases the probability of trading losses since it is not risk-free. The more the margin, the higher the risk.
Another risk associated with the free margin is that when a brokerage loses money, it may remove leverage. Therefore, you might have to start trading with less leverage to earn profits. You can make trades with less leverage, but you can’t lose less. Without leverage, you may have to set an entry and exit point for a trade.
Several online brokers provide Forex CFD trading services, and the differences are significant. Investing money for trading is not a simple thing; therefore, you should take the time to compare CFD brokers and be sure that you end up with the most reliable and affordable broker to trade Forex.
Whether you’re a beginner or an experienced trader, several advantages come with having free margin trading in Forex CFD brokers. You can make easy money without trading with high leverage, and using free margin trading in CFD brokers is one of the most important strategies for Forex traders.