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understanding margin & leverage in emini and futures
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understanding margin & leverage in emini and futures

  #1 (permalink)
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understanding margin & leverage in emini and futures

I want to understand margin and leverage better. I need to understand when your brokerage will close your down positions. When I first tried trading the e-mini someone terrified me about margin calls. I often closed down positions, or had stops so tight that I was whipsawed to death. Really had the crap beat out of me.
But then went to equities and took time learning. I only trade quality high volume stocks with good technicals, in an uptrend and with strong setups. And I am doing okay. I am at least not losing anything and hitting singles

I have learned to almost never use stops. So 1 or 2 bad candles does not hurt me. I would like to start trading the e-mini again. I have gained a lot of knowledge and experience. But I still don't really understand how margin and leverage work.

If your position is down when will the brokerage firm exit your position. This may depend on the broker. I will probably use IB. It seems to me that if firms will close you when you are down a few points the big dogs could smack smaller players around to easily. I can't assume that I enter perfectly every time. Holding a stock down 5 points may be possible. How does that work in futures, specifically the emini.

So can anyone explain to me how this actually works. When will positions be closed and how much margin should I have to keep them open through the occasional bad candle. Thank you.

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  #3 (permalink)
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  1. Please don't trade with real money until you first understand the leverage ramifications of the instrument you are trading.
  2. The amount of leverage allowed does depend on your broker. So ask them.
  3. If you use a broker that, for example, let's you trade ES intra-day and only requires $500 of margin per contract to hold it intraday, and you only have $100 in your account then this means a few things
    1. You can not trade with more than 2 contracts at a time (500 * 2 = 1000)
    2. Once your total position is down $1000, you will be forced to exit the position. With two contracts, that is down 10pts on the ES ($50/pt/contract)
    3. If you don't exit your positions before the end of the GLOBEX session then your account will become subject to overnight margin requirements, which is much more than intra-day margin requirements, so don't forget to always close out your positions if you're pushing your intraday leverage hard.

Personally, I never trade futures with so much leverage that I couldn't handle holding it overnight. You need to worry about sizing your positions not based on how much leverage you have, but how much risk/loss you are willing to take in the account if the trade goes against you.

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  #4 (permalink)
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shodson View Post
  1. If you use a broker that, for example, let's you trade ES intra-day and only requires $500 of margin per contract to hold it intraday, and you only have $100 in your account then this means a few things
    1. You can not trade with more than 2 contracts at a time (500 * 2 = 1000)
    2. Once your total position is down $1000, you will be forced to exit the position. With two contracts, that is down 10pts on the ES ($50/pt/contract)

I must admit that that is different to how I have always understood it. If you only have a $1,000 in your account but you aren't forced to exit until your total position is down $1,000 as in your example above then that sounds like trading with no margin?
In my mind, If margin is $500 per contract and I only had $1,000 in my account I thought you could trade one contract and lose $500 before getting a margin call and not be able to trade. To me margin is a 'floating' account zero line. Trading one contract your floating zero line is at $500, and you wouldn't even be able to trade two contracts because the margin is $1,000, so your floating zero line is $1,000 and the trade couldn't go one tick negative without eating in to the margin and triggering a margin call.
A small account over leveraged is the quickest way to lose it and not give yourself anytime to actually learn anything before having to stop. Somebody using a margin call to exit a position means they can't trade at that size again for their next trade, or at all if the margin call was on a one lot, or they now need to put more funds in to the account. People quite often talk about account sizes of five to ten thousand per contract traded as a general rule of thumb. But then others will say you only need a lot less.

And leverage means you can trade a much higher value of contracts than you are putting money up for in margin. So with the ES currently at around 2400, and worth $50 a point that gives a value of $120,000 per contract traded (or in another way, not that it would happen, lost; if the index price ever went down to zero like a company stock could). With a margin of only $500 needed to be put up to control a $120,000 position that is 240 times leverage. Like being able to buy shares but only needing to pay up front 0.5% of the face value to own them. With the ES being a very popular product you will find some brokers offering very cheap day rate margins and minimum account sizes to entice customers, you will also see other brokers that require higher margins that are a lot closer to the overnight margin because they know that day traders looking for the lowest possible margins for their tiny accounts invariably blow up very quickly and it is just a hassle for them to do all the paperwork and set the account up and make practically nothing in commission. Brokers earn their money from commissions. It is in the interest of a decent broker to have successful adequately funded clients that can survive the inevitable starting drawdown and hopefully come out the other side consistently profitable.

Note: Mulling over the paragraph about margin I realise I am probably wrong because of remembering brokerage warnings that account balances can go to zero or even negative. That couldn't happen in my example. I have thought of margin as a 'cushion' that can't be gone below when actually it is just a deposit that can be lost. Less money will be lost though and less quickly using margin as a cushion.


Last edited by matthew28; April 26th, 2017 at 05:45 AM. Reason: Note added.
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