Initial Margin
The initial margin is the minimum amount of capital required to open a futures position. Unlike traditional stock trading, where you must pay the full value of an asset, futures trading allows you to control a larger contract size with a fraction of the total cost.
How Does Initial Margin Work?
Before entering a trade, you must deposit the required initial margin in your account.
This acts as a performance bond, ensuring that you have enough funds to cover potential losses.
The initial margin is not a fixed amount—it varies based on multiple factors, including:
The specific futures contract being traded (each market has different margin requirements).
Market volatility (higher volatility may lead to higher margin requirements).
Exchange requirements (regulated by CME, ICE, or other futures exchanges).
Brokerage risk policies (some brokers set higher margin requirements than exchanges).
Example of Initial Margin
Let’s say the initial margin for a specific futures contract is $2,000. This means:
✔ You only need $2,000 in your account to open the position.
✔ Even though the contract’s total value may be much higher, you’re only required to deposit the initial margin to trade.
Why Is Initial Margin Important In Futures Trading?
✔ Ensures traders have sufficient funds to cover potential losses.
✔ Helps manage risk and prevent excessive leverage.
✔ Required by exchanges to maintain market stability.
Maintenance Margin
Maintenance margin is the minimum account balance required to keep a position open in your trading account. It ensures that traders have enough funds to cover potential losses and maintain their positions without being liquidated.
How Does Futures Maintenance Margin Work?
When you open a trade, you must meet the initial margin requirement (the amount needed to enter the position).
As the market fluctuates, your balance may increase or decrease based on your trade performance.
If your account balance falls below the maintenance margin, your broker may automatically close your position to prevent further losses.
Typical Futures Maintenance Margin Levels
Maintenance margin is usually 50% to 75% of the initial margin.
For example, if the initial margin for a contract is $1,000, the maintenance margin may be between $500 and $750.
Why Does Futures Maintenance Margin Matter?
✔ Helps manage risk and prevent excessive losses.
✔ Ensures you have enough funds to support open positions.
✔ Protects your account from being liquidated unexpectedly.
To avoid forced liquidations, always monitor your account balance and ensure it stays above the maintenance margin level.