Margin is a performance bond in the form of cash or other collateral deposited by a client trader to ensure that he will honor his trading commitments. This performance bond must be deposited into a margin account before a trading account can be opened. The margin account will be needed to perform transactions and maintain open positions.
For instance, if you performed a transaction to "buy 100,000 USD/CHF" with a 50:1 leverage, you would need to have $2,000 US dollars available in your current balance. This security deposit is called Margin and is always calculated in US dollars no matter what the base currency is in this transaction. For instance if you sold 200,000 Euros against GB pounds at 20:1 leverage and the rate EUR/USD=0.95, you would need the deposit of (200,000/20*0.95=9,500) 9,500 US dollars.
It is self-evident that to enter into more trades, you will need to have more funds in your margin account in addition to the Used Margin. These additional funds are called Free Margin. The Free Margin is the positive difference between your current Equity and Used Margin if the Equity is less than your account balance, and you have some unrealized losses that are currently outstanding in the open positions. When your Equity is larger than the balance, the Free Margin equals the positive difference between the balance and Used Margin. If you do not have enough margin to enter into a new trade, no more positions will be opened. For example, you have 9,500 US dollars in your margin account and you bought 300,000 US dollars against Japanese yen at 50:1 leverage. Your Used Margin equals 6,000 dollars (300,000/50) and the Free Margin is 3,500 dollars (9,500-6,000). You may want to sell e.g. 200,000 dollars against Swiss franc, but you will not be allowed to do so, since your Free Margin is less than what you need (200,000/50=4,000). However, you can sell 100,000 USD/CHF using $2,000 of the Free Margin. In that instance your Used Margin will be $8,000 (6,000+2,000) and the Free Margin $1,500 (9,500-8,000). With closing of any open position your Used Margin will be decreased by the amount of the margin used for keeping this position.
