A constant to any futures trading strategy is managing margin risk. It has been said, with increased risk comes potential for increased profit. The mechanics of managing margin risk should be taken very seriously while balancing the opportunity it can bring.
What is Margin?
Margin is the minimum amount of capital required to trade a financial instrument (ie. a futures contract). The amount of margin required could be considered a deposit on the financial instrument you are trading. The difference between the required margin amount and the value of a financial instrument could be considered loan from your brokerage. At the end of the day, you and then your brokerage is responsible for any excess of capital beyond the margin amount.
Benefits of Margin
By integrating intraday margin into your futures trading strategy you can:
- Leverage your capital
- Control more risk
- Have the opportunity to achieve higher profits
- An e-mini S&P 500 futures contract is worth $50 X the value of the S&P 500 Index
- This is in all likelihood several times the intraday margin required to purchase a contract. Meaning you can control an S&P 500 futures contract for a fraction of its value
Risks of Margin
A margin call is the point at which the risk of a position in the market is too great for:
- Your brokerage to back
- Your account to sufficiently fund without exceeding its value
To avoid liquidation of a market position, always be aware of the margin requirement set by both your brokerage and the Federal Reserve Board. If the value of your financial instrument decreases beyond the amount of capital in your trading account, you will receive a margin call or the liquidation of your position(s).
Why Choose to Day Trade?
Due to the risk involved with using margin, one strategy is to only trade intraday or day trade, meaning buy/sell within a single trading session. This limits overnight risk by:
- Avoiding low trading volume
- Avoiding ‘loose’ or ‘wide’ price spreads (amount between the bid and ask)
- Avoiding large price swings or momentum shifts due to foreign elements outside of your knowledge base. Ex. foreign bank interest rate hikes or changes in OPEC controlled oil supply
- Being able to react to market conditions in real-time or while you are awake
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