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Beginner Question - Margin Requirements
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Beginner Question - Margin Requirements

  #1 (permalink)
Trading Apprentice
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Beginner Question - Margin Requirements

Hi everyone,

Total newb here, so please excuse my questions (especially in comparison to the more advanced questions and topics found in this sub-forum!).

I'm currently contemplating starting playing with grains. I'm still in the early stages of my learning, but at this point and time, I would like to use traditional technical analysis and momentum indicators as my "trading system" to identify primary and secondary trends, entry and exit points.

In order to derive an accurate P&L model, I want to understand a bit more the dynamic. So for example, let's say I buy 1 contract of Soyoil (currently trading at 33.50 cents / pound for a 60,000 pound contract), the exchange margin requirement is US$880 ($800 + 10% for speculative position). Let's say this position starts to move against me.

At which point does a margin call happen? Is it based on the settle? Or would I need to post margin overnight if the price were to move against me such that my equity drops below my maintenance margin?

Thank you very much and I am looking forward to learnings lots on this forum!

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  #3 (permalink)
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Omer עומר / Israel י
 
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In my opinion bad mindset... you are looking for maximal gearing, which is perfect plan for disaster.
Very common beginner plan...

Try to approach the problem different.
Try not to loose more than 2% of your capital on a single trade and you will have a very basic money management system that protects you from over-gearing.

Keep in market that some of the grain markets, can be 'closed' if the move is to big, and you are then simply unable to trade, means your stop sits there, but no execution, the price could several days in a row make a jump and this would result in a very big slippage... (image you are then into maximum gearing, you would be roasted/toasted, death in the water before you can even close your position).

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  #4 (permalink)
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rleplae View Post
In my opinion bad mindset... you are looking for maximal gearing, which is perfect plan for disaster.
Very common beginner plan...

Try to approach the problem different.
Try not to loose more than 2% of your capital on a single trade and you will have a very basic money management system that protects you from over-gearing.

Keep in market that some of the grain markets, can be 'closed' if the move is to big, and you are then simply unable to trade, means your stop sits there, but no execution, the price could several days in a row make a jump and this would result in a very big slippage... (image you are then into maximum gearing, you would be roasted/toasted, death in the water before you can even close your position).

Thanks @rleplae, those are helpful comments.

I'm not sure that I am "solving" for maximal gearing. In fact, at this point, I'm just trying to understand the mechanics of that market (grain example, but essentially applicable to all futures) and how margin requirements are serviced (hence my questions on intraday vs. settle, etc.).

Perhaps I'm not looking at my trades the right way? Here's how I do it on my paper trades. Taking the example below, I buy 1 contract of soyoil @ $.3350 / pound for 60,000 pound for a value of $20,100. My upfront requirement is $880. Assuming a capital base of $250,000, I am limiting myself to a 1% capital loss before I close my position. This means I'm willing lose $2,500 of my capital.

I'll achieve a loss of $2,500 of capital when the price reaches $.2933 (12% downside).

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  #5 (permalink)
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Dibbs View Post
Thanks @rleplae, those are helpful comments.

I'm not sure that I am "solving" for maximal gearing. In fact, at this point, I'm just trying to understand the mechanics of that market (grain example, but essentially applicable to all futures) and how margin requirements are serviced (hence my questions on intraday vs. settle, etc.).

Perhaps I'm not looking at my trades the right way? Here's how I do it on my paper trades. Taking the example below, I buy 1 contract of soyoil @ $.3350 / pound for 60,000 pound for a value of $20,100. My upfront requirement is $880. Assuming a capital base of $250,000, I am limiting myself to a 1% capital loss before I close my position. This means I'm willing lose $2,500 of my capital.

I'll achieve a loss of $2,500 of capital when the price reaches $.2933 (12% downside).

You would need to decide in your trading style, what is your stop (in ticks)
then ticks X value per tick = per contract monetary loss
2500$ / per contract monetary loss = number of contracts

If you stick to 1%, your margin is never an issue, you are imposing yourself much higher constraint
that what the broker is offering you.

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  #6 (permalink)
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rleplae View Post
You would need to decide in your trading style, what is your stop (in ticks)
then ticks X value per tick = per contract monetary loss
2500$ / per contract monetary loss = number of contracts

If you stick to 1%, your margin is never an issue, you are imposing yourself much higher constraint
that what the broker is offering you.

right, I understand that and I think that's what I was trying to convey in my message. If you rightsize the # of contracts and how much you are willing to lose in terms of tick, then margin is never an issue because you have this capital set aside.

But, going back to my initial question which was, how does the mechanism for margin call works? is it an RTH or ETH thing? Does the margin get computed at settle? live? etc.

Thanks!

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  #7 (permalink)
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Dibbs View Post
right, I understand that and I think that's what I was trying to convey in my message. If you rightsize the # of contracts and how much you are willing to lose in terms of tick, then margin is never an issue because you have this capital set aside.

But, going back to my initial question which was, how does the mechanism for margin call works? is it an RTH or ETH thing? Does the margin get computed at settle? live? etc.

Thanks!

Margin is continuously calculated.

If you incur intra-day losses (realize or not-realized), they eat your margin.

There are two margin requirements (varying by broker):
- intra day margin (= you close out all positions at the end of the day)
- overnight margin (= you keep open positions into the next day)

See also this link

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