Adequate account capitalization, and protection of capital, are key components of trading leveraged markets. Margins are a vital risk management tool utilized by futures clearing firms and futures exchanges to provide security to the market, and the individual market participants. Margins are essentially performance bonds, good-faith financial deposits which guarantee the performance of futures contracts. Margin requirements function as a guarantee that market participants will be able to meet the financial obligations for the trades which they undertake.
Margin rates are calculated based upon volatility levels, not price levels. As daily price movement expands, and more volatility develops, margins are typically increased to account for the corresponding enlarged risk exposure. Likewise, a contraction in volatility levels typically decreases risk exposure, and lowers margin rates for a particular commodity. Numerous factors such as economic policy changes, political events, supply/demand shifts, key commodity reports, and changing weather conditions may contribute to volatility swings individually, or combined.
Margin requirements for futures trading can be set considerably lower, in comparison to the 50% minimum margin requirement to trade individual stocks. Although these depressed margin levels may permit you to buy and sell additional futures contracts utilizing considerably less capital than comparable trading vehicles, this increased leverage can cause clients to lose part of, or all of their trading capital. Through our years of experience, we have discovered that our most successful trading partners risk less than 5% of their available margin capital on any single trade. It is imperative for traders to understand the advantages, as well as the disadvantages, of leverage. Potential returns must always be weighed against a commensurate level of risk.
Margins are subject to change based on market conditions and exchange guidelines.
To view the latest margin requirements provided by R.J. O'Brien click Quick Margins Guide.
This material has been prepared by a sales or trading employee or agent of Byrne Investment Services, Inc. and is, or is in the nature of, a solicitation. There is a significant risk of loss when trading futures and options contracts. Please read our full disclaimer.
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