Electronic mini-market trading is becoming more and more popular. Many public companies offer these e-markets to their customers with little or no instruction. While they may seem new and exciting at first glance, there is little difference between e-minis and the futures markets trading on the pit. In fact, regardless of whether you are trading electronic markets or stock markets, the way a symbol is quoted does not change. The layout of a typical symbol of the futures market; market, month and year are the same. The main differences between the two different types of markets, e-mini and pit, are the lower fees and margins.
When the e-mini’s margin is significantly cheaper than the stated margin, this is called broadcast. Gearing is the ability of a futures commission seller to vouch for you on an exchange. They lend you even more credit than the standard margin because they want you to be able to trade more contracts than you would normally do in your account. This is usually offered to day traders.
However, this transfer requires two costs. The first cost is positional control. When you set up your trading, you are only allowed to be a day trader. They only offer you reduced trading margins during the day or evening session, whichever you choose. You must stop trading by the end of the day, otherwise you will be penalized for holding the position overnight. This could mean higher margin requirements or liquidated trading positions.
In any case, it is important that you understand the responsibility associated with large discounts. The second cost of leverage and trading in the era of electronic markets is the inability to accurately insure your options trading. There are few options on electronic markets and their level of liquidity is suspicious. So while using e-marketplaces can be an added convenience for you, there are velvet handcuffs that can interfere with your risk management practices if you’re not careful.
Thus, while this increased margin seems large, you still have both initial and maintenance margins. This can force you to enter and exit trades throughout the day if you are reckless about the number of contracts you have when you are in the mood.
There are two types of margin: initial margin and maintenance margin. The initial margin is the amount to enter the trade, and the maintenance margin is what you need to stay in the trade. Knowing both numbers gives you a clear idea of where you stand. For those with stock trading experience, futures margin is nothing more than exchange margin. Your gains and losses are added to or subtracted from your margin in real time. The margin you expose to hold the contract is considered part of your equity and is treated as such.
The margin is based on volatility and can be adjusted based on the degree of risk you experience when trading or in your account. As a speculator, you will have to deposit the maximum required margin. For example, if you are trading the British pound, the initial margin will be 1480 and the maintenance margin will be 1100.
Maintenance margin is a little more complicated. Maintenance Margin is designed to give your trading respite if the market moves against you. You don’t need to act when your account drops below the initial margin, just when the maintenance margin is exceeded. That’s when you need to get your account back to the entry level margin. It is called requirement for additional security. The easiest way to avoid a margin requirement is to choose the right trade! Instead, do not over-leverage. This is why it is not a bad idea to trade only one mini-contract at a time in the beginning. Thus, you can create a large enough reserve on the account, as well as reputation.
At all costs, you want to avoid the margin call. In fact, you should never put extra money into your account to cover a losing trade. If you feel obligated to do this, then you are acting out of desperation and not in your own interests. There is no point in throwing good money for bad money in no universe.