Forex Leverage and Margin, Margin Required, Equity, Used Margin and Free margin

Margin required : It is amount of money your Forex broker requires from you to open a position. It is expressed in percents.

Equity : It is total amount of capital you have in your account.

Used margin : amount of money in your trading account that has already been used up when buying a currency contract, this contract is one that is displayed in open positions. As a trader you can not use this amount of money after opening a trade order transaction because you have already used it and it is not available to you.

In other words, because your broker has opened up a position for you using capital you have borrowed, you must maintain this usable margin for your trading account as a security to allow you to continue using this leverage he has given you.

Free margin : amount in your account that you can use to open new trades. This is amount of money in your account which hasn't yet been leveraged because you have not yet opened a transaction with this money - this money also is very important for you as a investor because it enables you to continue holding your open trades as will be explained below.

However, if you over use leverage, this free margin will drop below a certain percent at which your broker will have to close all your positions automatically, leaving you with a big loss. Broker at this point closes all your position because if your positions are left open they would lose the money you've borrowed from them.

This is why you should always make sure you've a lot of free margin. To do this never trade more than 5 percent of your forex account, in fact 2 percent is recommended.