What the Heck is a Usable Margin?

Usable margin is simply Equity less Used Margin…no brainer right?!

Equity is the total amount of money that your account holds and plays a crucial role in the smooth running of your trading activities. Equity determines two major components of your trading activity which are: the Usable Margin, and when or if a margin call is reached.

To put it simply, Equity is like a gold mine, the more there is the better off you are as you will have more to trade with. Thus as long as your Equity is greater than the used margin, you may rest assured that you will not have the dreaded margin call.

To illustrate the Margin Call principle in action, consider the following example:

Let’s assume that you open an account of $1000 and buy 1 lot with a margin requirement of 1%. Thus used margin in this example is $10 with usable margin being $990. Now let’s assume that you are feeling on top of the world and that you are 100% confident that the next position you are going to take in the market place is a winner. You take a buy position using 60 lots. Your Used Margin will be $600 (60 lots times $10 margin per lot) and your usable margin will be $400. Imagine the profit you will make if that position goes your way, that is some nice chuck of change indeed.

But what if it goes against you, “Houston, we have a problem”.

A massive problem indeed, a move of less than 7 pips against you and you are toast.

Usable Margin of $400 divided by $60/pip = 6.6 pips (to be more precise)

That’s were you will receive a Margin Call as your equity drops below $600 and this has been done without taking into account the spread. Now you see what I am talking about.

Happy Trading.

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