In trading, these terms relate to how much capital you need to hold and manage for your open positions.
Margin is the amount of money a trader needs to deposit with their broker to open and maintain a leveraged position. It's not a cost, but rather a good-faith deposit that ensures the trader can cover potential losses. Essentially, it allows you to control a larger position with a smaller amount of capital.
Example:
If you want to trade 1 standard lot of EUR/USD, which is 100,000 units, and your broker requires 0.5% margin, you would need to deposit:
0.005 * 100,000 EUR = 500 EUR (or its equivalent in your account currency) as margin.
A margin call occurs when the equity in your trading account falls below a certain percentage of the margin required to maintain open positions. This typically happens when your open positions are losing money, and your available funds are no longer sufficient to cover potential further losses. When a margin call is issued, the broker will request you to deposit additional funds to bring your account equity back up to the required level, or they may automatically close some or all of your open positions to reduce the margin requirement.
Example:
You have an account with $5,000, and you open positions that require $1,000 in margin. If your account equity drops to $800 (due to losing trades), and your broker's margin call level is 100% of margin required, you would receive a margin call because your equity ($800) is less than the margin needed ($1,000). You would need to deposit at least $200 (or more to avoid immediate closure).
Free margin (or usable margin) is the amount of equity in your trading account that is not currently being used as margin for open positions. It represents the available capital you have to open new positions or absorb further losses from existing positions before a margin call is triggered.
Formula:
Free Margin = Equity - Used Margin
Example:
You have an account balance of $10,000. You have open trades that are currently using $2,000 as margin.
Your current equity is $9,500 (due to some small losses on open trades).
Free Margin = $9,500 (Equity) - $2,000 (Used Margin) = $7,500
This $7,500 is the amount you can use to open new trades without immediately triggering a margin call.