Futures Trading: What Are Margins

Futures Trading Margin Requirements #

When trading futures and commodities, margin plays a crucial role. But what exactly is margin?

Margin can be thought of as “earnest money” or a “down payment” that you must set aside to initiate a futures contract. It involves allocating a certain portion of funds, borrowed from your Futures Commission Merchant (FCM), to hold an open speculative position.

Is the margin deducted from my account balance? #

Yes, the margin amount is temporarily deducted from your account balance while you hold the position. However, it is returned to you once you close the transaction.

If I still have funds remaining in my account after posting the margin, can I use the remaining balance to trade other futures and commodities? #

Certainly! You can utilize the remaining funds in your account to trade other futures and commodities. Moreover, any profits you earn may provide the opportunity to trade additional contracts, depending on the extent of your gains.

What is the maintenance margin? #

The maintenance margin refers to the minimum capital amount that your account must maintain. As long as your account balance remains between the initial margin and the maintenance margin, you are considered to be in good standing.

How do day trading margins differ from overnight margins? #

Day trading margins and overnight margins are distinct from each other.

For positions held beyond the day trading session, you are required to meet the margin requirements set by the exchanges themselves. Futures brokers and clearing firms do not control overnight margins. You must precisely meet the margin obligations dictated by the exchange.

Day trading margins, on the other hand, are determined by the brokers and can be reduced for traders who intend to take larger positions and require extended credit from their brokers. Each commodity has specific trading hours that mark the end of the day session, and day traders utilizing lower margins must close their positions before the session concludes.

What is a margin call? #

A margin call occurs when your available cash falls below the required amount to maintain your futures and commodities positions. In such cases, you must either liquidate all or part of your positions. It is advisable to avoid margin calls as they can impact your relationship with your futures and commodities broker. It’s worth noting that many brokers no longer issue traditional “margin calls” and may instead automatically liquidate a sufficient portion of your position to keep your account above the required margin level.