Margin

Note: The Shares trading has a kind of different meaning for Margin. Traders have the term associated especially with money which the broker is willing to lend them. In this article, however, we describe margin, and its importance to Futures trading (e.g. commodities).

Margin is a sum of money, that is at first blocked and after we exit the trade credited back to our account. It is blocked because of the Leverage, we can use. By blocking the margin Broker protects himself against unexpectedly high losses we can suffer in the trade. He wants to cover potential losses of all involved parties, as we trade not just with our own money, but also with some borrowed funds.

The higher leverage we have, the lower Margin needs to be blocked to get the same profit and vice versa. The Margin and Leverage are determined by Brokerage firms, but Margin is determined primarily by an Exchange (e.g. Chicago Board of Trade - CBOT). Brokerage firms can then adjust the Margin according to their own requirements and needs. For you, as an investor using Leverage trading, the most advantageous way is to trade with low Margin blocked and high Leverage allowed.

We do not need to worry about the fact, that some money are blocked on our trading account. As mentioned earlier, after exiting the trade the Margin is credited back to our account. What is however important to know, is the exact amount of money, our Broker will block for every trade. It usualy depends on the volatility and liquidity of the market we want to trade. If we choose to trade a highly volatile Futures market e.g. coffee, oil, etc. a much higher margin will be blocked, as if we would trade e.g. soybean oil or corn. So we come to the fact, how the Margin affects our trading account. We must have the sufficient funds on the account to be able to buy also other contracts or to cover the losses that we can suffer etc.. This means that we can't buy an infinite amount of contracts, but we are limited by the amount of margin per contract and the amount of our own deposit. With the optimum amount of blocked margins deals the Position sizing.

Generally it is not recommended to have more than 40% of the account blocked in the Margins. In my opinion, however, this amount is too high and I would recommend a much lower percentage. (You can calculate the recommended amount e.g. through the Kelly Formula - Position Sizing section).

What does this mean in practice? Let's suppose that we have an account of USD 10,000 and we don't want to have blocked more than 20% of the account (i.e. 2000 USD) in the margin. Then if the margin is 1,000 USD we can buy 2 contract max.. Should it be 500 USD, then we could buy up to 4 contracts max..

As mentioned earlier, the amount of the Margin is at first determined by an exchange and is subsequently adjusted by the individual brokerage firms. It is also affected by the volatility of markets. It means that the margins use to change, so we won't mention them all in this article as a fixed dogma. Here are some examples, as it may look when we trade e.g. on the Chicago Board of Trade (CBOT) market.

From the above information, you can read 4 main differences in the margins:

• Initial or Maintenance
• Intraday or Overnight

On entering the trade, the Initial Margin is blocked on our trading account - it is important to have at least this amount to enter a trade. Maintenance Margin is needed to continue in the trade. Its importance raises especially when the trading account declines.

Another difference is between Intraday and Overnight margin. When we enter a trade, the Intraday Margin is blocked. There is a possibility that the contract will be sold on the same day - so an Intraday trade would be made. However, if we keep the contract after closing the market, the Overnight Margin would be blocked. It is also higher, compared to the Intraday margin. During the next day we return to the Intraday margin, while at night to the Overnight one.



To sumarize the information listed above: On entering the trade (it doesn't depend whether we buy or sell), the Intraday Initial Margin is blocked on our account. After the closing of the market the Overnight Initial Margin is blocked. After closing all our positions, the whole Margin is credited back to our trading account.

Intraday margin used to be significantly lower than the overnight one. At present, however, a number of underlying assets, have the same Intraday and Overnight Margins. This is especially due to preferences and new rules of the Exchange, as well as the increased volatility in markets.

Note: For accurate determination of the Margin amount visit the website of the exchange (but such Margin is just approximate), or look directly at the webpages of your broker (he must indicate the exact amount, he will block on your account).