Understanding the margin is extremely important in trading, allowing us to work effectively with our capital. To trade individual stock instruments, we need to have enough money in our account. Brokers have their tables where we can learn the minimum and recommended limit for the funds we should have on the trading account.
In practice, this means that when entering the trade, a broker blocks an amount of funds from our account as a margin.
It’s broker protection and you should remember that every financial instrument has different margin requirements.
In this article we will introduce both futures and forex (generally CFD) margin.
There are relatively high margins in futures markets. Here we divide two basic versions of the margins:
Intraday Initial – the initial margin you need to enter to the given futures market during the day.
Intraday Maintenance – the minimum margin under which your account must not fall during the trading day or your trade will be closed by the broker.
Margin values may look like this:
|Intraday Initial||Intraday Maintenance|
We will better understand the importance of the margin in a small account. If your trading account has balance $ 4,000 and you enter the Intraday Initial $ 3500 trade and Intraday Maintenance is $ 3000, it means you only have left $ 500 in your account after you enter the trade. (Account 4000 – Intraday initial 3500 = 500). Maintenance margin has not yet come into play.
If the trade gets into an open loss of $ 500, your funds on the account off the margin are exactly 0. If the market goes further against you and the trade is developing badly, the loss grows to – $ 1,000. Exactly on the level $ 3000 (Account 4000 – loss 1000 = 3000 – this amount is also the minimum amount for Intraday Maintenance). The difference between Initial and Maintenance margin is $ 500. As we have already said, a loss of $ 1,000 means that the broker will close our position because we have reached the minimum of the Maintenance margin. So, what happened to us that the broker closed our loss-making position without our permission?
- We’ve lost – $ 500 from our free funds that have been left on our account after Initial Margin was blocked, ie the account balance is zero ($ 3500 still blocked as the Initial margin)
- The loss thus began to be deducted from the Initial Margin of $ 3500, which is blocked by our broker when entering the market. The loss has been deducted further until it reached $ 3000 in our blocked Initial Margin.
- Exactly at this time, we are at $ 3,000, at the Intraday Maintenance level at the same time, and the trade is closed. We do not have enough money to keep in the trade and the broker does not want to risk anything, so he will not let us lose more money than was the maximum level set by the broker.
Important note: Although our account has not reached zero, we still have $ 3,000 in our account, we cannot trade the same level of margin in the market as before. Still, we could trade cheaper markets.
It is also very important to note and emphasize that Initial and Maintenance margins are not counted together. You do not need to have funds in your account that are higher or the sum of both margins.
So, when trading futures, choose cheaper markets if you want to start with a smaller account.
P.S .: There are also overnight initial and overnight maintenance margins that are higher than the daily ones. Be careful when staying in the trade overnight.
Forex margin is calculated entirely differently, mainly due to the leverage effect. (which will be published next week). Margin is based on your leverage and therefore very different. With a leverage, you can open a $ 100,000 position with a $ 1000, – 100: 1 account leverage. Some brokers offer a leverage up to 2000: 1, one broker even an endless leverage, but that’s the real extreme.
There is a formula for Forex margin calculation:
Specific examples of calculation:
Your account currency = USD
Currency pair = GBP / CHF
Base = GBP; Quote = CHF
Base / Currency of your account = GBP / USD = 1.51500
Trading volume = 1 lot = 100,000 units
Leverage = 500: 1
(1.51500 * 100,000) / 500 = 303.00 USD
Just because of a ridiculously high leverage, you can trade large positions with a small account, which can get you a lot of appreciation. Do not forget, however, that the leverage works on both sides. You can make a trade for tens of percent, but you can also loose the same percentage.
The table below demonstrates the size of the margin depending on the leverage as well as the size of the position that you can open with your leverage.
|Leverage||Position size||Required margin|
|1:1||$100 000||$100 000|
|2:1||$100 000||$50 000|
|50:1||$100 000||$2 000|
|100:1||$100 000||$1 000|
Question at the end.
Are you sure you want to manage a $ 100,000 position with a $ 250 account? 🙂
In fact, leverage 1:10 is enough in the real terms, we do not need more for serious trading, not even for a strategy portfolio. Choosing a broker by leverage is therefore not necessary.