Initial Margin Requirements for Futures Trading
Margin requirements for trading are often confusing to new traders.
Today I will break it down for you and explain the difference between initial margin requirements and maintenance margin.
Initial Margin Requirements – What is Margin?
Margin refers to the portion of the capital you need to put down as a trader to take a trading (or investing) position.
Essentially, you are only paying a fraction of the total cost for a position and the broker lends you the other portion.
For the remainder of this article, we will focus on margin requirements for futures trading.
Stock margin is a little different, as you are charged interest on the loan portion of the position.
Trading stocks on margin is significantly more risky than futures, and I would not advise it for active trading strategies. But that’s a topic for another article.
Futures trading allows you to put down a small amount of margin (capital) and you are not charged for the remainder of the position loan value.
Overall, there are two types of margin:
- Initial margin requirements
- Maintenance margin requirements
What is Initial Maintenance Margin for Futures Trading?
Initial maintenance margin is the dollar amount required to open a trade position.
Every broker has their own risk parameters, and the requirements differ slightly. Often times traders make the mistake of assuming less margin is more lucrative.
However, margin is a tool that you should only use when you are more experienced.
Over-leveraging is the biggest cause of failure for new traders.
Let’s take the time now to go through an example of how initial maintenance margin works.
Imagine you want to purchase one futures contract on the SP500 stock market index.
Pulling up the margin requirements for AMP Futures (a brokerage), we see the following table:
(this is for example purposes only, be sure to check your broker and the updated margin table)
Looking at the SP500 index futures (symbol ES) reveals that Day trade margin is $400 USD per contract.
This day trade margin is your initial margin for opening a trade.
Therefore if you chose to purchase one contract, you only need to have $500 USD. This is why futures trading is so lucrative for small account sizes.
Each point the SP500 futures move is a $50 profit, or loss.
Now that you understand initial margin requirements, let’s jump to the next topic.
How is Maintenance Margin Different from Initial Margin?
Maintenance margin refers to the capital you need to hold a position through the session close.
The SP500 futures close at 5PM EST daily, and re-open at 6PM EST the same day.
This means there is only one hour of closure.
When markets are closed, you and brokerages are exposed to gap risk.
Gaps are when prices move while the market is closed due to a news event or an increase of volatility for whatever reason.
If you want to learn more about the best futures trading hours click here to read this article >
Because of this risk to the broker, they raise their margin requirements.
Your higher requirement is called maintenance margin.
Looking at the same table above, you’ll notice the margin jumps to over 10x the day trade margin, to $5,600 USD per contract.
To avoid this increase of capital usage, you simply need to close your position before 4:59:59 PM EST.
However, some brokers require 4:55PM, so it is important to check with yours to clarify when margin requirements increase.
Initial Margin Requirements for Futures Trading – Conclusion
Futures trading is very lucrative for small accounts as there are very low initial margin requirements.
This allows you to have maximum capital efficiency. You can hold a relatively large position with a small account.
However, it is a mistake to jump in and use your full margin from the start.
You should never be in a maximum margin position as the risks of failure and capital loss are heightened.
Day trading successfully requires you to be disciplined and in control of your loss.
However, with the right training and being around the right community day trading successfully is very possible.
If you want to join us in our live trading room, check out the Day Trader package here >
If you prefer to trade more passively, checkout our newsletter, trade ideas and live analysis in the Swing Trader package here >
The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.