Margin, Free Margin and Account Balance

Hi Guys,

I was watching a video about forex where the author was explaining about margin, free margin and leverage, using the following image:

In this video, he explains that when the market moves against you, the money that you will start losing is your free margin, like in the image below:

My doubt is: For me, when I started a operation, the only money in risk was my margin and the broker money, so why I’m losing the money in my account balance? This is correct? If yes, why?

Thanks for all,

[quote=“hilty, post:1, topic:119354, full:true”]

My doubt is: For me, when I started a operation, the only money in risk was my margin and the broker money, so why I’m losing the money in my account balance? This is correct? If yes, why? [/quote]

Hello hilty, maybe this will clear things up for you –

Whose money is at risk?

There is no broker money involved in your trades. Your broker is not going to let you put any of his money at risk.

When you place a trade, only your money is at risk – and one of the purposes of used margin is to assure that it is your money, and only your money, that is at risk. When you earn a profit, all of the profit is yours. And when you take a loss, all of the loss is yours. It’s important for newbies to get comfortable with the fact that brokers do not lend money to traders so that they can trade using leverage.

Keep in mind that there is no buying or selling of currencies in the retail forex market. When you go LONG a particular pair, you are not buying the base currency and selling the quote currency (even though some teachers and authors will claim that’s what you’re doing). Rather, you are placing a bet of a certain size (your position size) on the direction that a particular currency pair will move.

The size of your bet is not limited to the amount of money in your account. You can bet up to a certain multiple of your account balance, as dictated by your broker and the regulator he operates under. That multiple is referred to as maximum allowable leverage. In the U.S., maximum allowable leverage is limited by the CFTC to 50:1.


When you place a trade, your broker sets aside a portion of your money, protecting it from loss, and putting it out of your reach for the duration of your trade. This portion of your money is called used margin, but it can be thought of as a security deposit, a good-faith deposit, an escrow amount, or a performance bond.

The graphic you posted is correct, except for one detail. There are two types of used margin: initial margin, and maintenance margin. Initial margin is the margin required to open a trade; maintenance margin is the margin required to stay in the trade (maintain the trade).

Many brokers specify maintenance margin as 50% of initial margin. So, in the case of a U.S. broker, the CFTC mandates 2% initial margin (corresponding to 50:1 maximum allowable leverage), and then brokers typically require that 1% margin be maintained, until those positions are closed.

In the graphic you posted, a stop-out should not have been depicted at the level of the initial margin. Rather, a lower level should have been shown, representing the level of the maintenance margin. If losses consume all of the account down to the level of the maintenance margin, then a forced liquidation (stop-out) of all open positions will occur. This is commonly referred to as a margin call, but this terminology is misleading. Your broker will not call you, requesting that you deposit additional margin. Instead, he will immediately stop you out of all your open positions.

The purpose of used margin is to provide a safety net under your trade, so that if you blow out the rest of your account, forced liquidation of your position(s) will stop the bleeding and preserve a portion of your account.

In addition to preserving some of your money (which you may then use in the future to continue trading, or withdraw), this forced liquidation also prevents your balance from going negative. A negative balance would result in owing money to your broker. To repeat the point made above, your broker is not going to allow you to risk (or lose) any of his money.

Obviously, if used margin (either initial, or maintenance) is a portion of your account, then the remaining portion is unused margin.

I hope this answers your questions.


Hello Clint,
I know that margin is to prevent our account from blowing, but what happened to my trades usually went like that.I sold at profit but prices went higher than when I sold it,So, I have negative balance.Why?
Why did my account became negative and lose my $30? What shall we really do after selling and putting SELL STOP order?

Great :ok_hand: Really helpful information

Where do you have negative balance?

I am looking the image and only see that free margin is negative.
That means you can expect margin call where some or all your positions will be closed.

Could you give the image where you have negative balance?