It has become increasingly popular to trade e-mini markets. Many stock companies are offering these electronic markets to their clients with little to no instruction. While on the surface they may seem new and exciting, there is little to no difference between the e-minis and the pit-traded futures markets. In fact, whether you are trading the electronic markets or the pit-traded markets, the way the symbol is quoted doesn’t change. The layout of the typical futures market symbol; market, month, and year are all the same. The primary differences between the two different types of markets, e-mini versus pit, revolve around reduced commissions and margins.
When the e-mini margin is significantly cheaper than the quoted margin, this is known as gearing. Gearing is the ability of the Futures Commission Merchant to essentially vouch for you at the exchange. They extend you even more credit than the standard margin because they want you to have the ability to trade more contracts than you normally would in your account. This is typically offered to day traders.
This gearing comes with two costs though. The first cost is position control. When you gear your trading, you are allowed only to be a day trader. They offer you the reduced trading margin only during the day or evening session, depending on which one you pick. You must be out of your trade by the end of the day or you will be otherwise penalized for holding a position overnight. This can mean increased margin requirements or liquidated trading positions.
Whatever the case, it is important that you understand the responsibility that comes along with deep discounted commissions. The second cost of gearing and trading in the electronic markets period is the inability to accurately hedge your trading with options. There are few options on the electronic markets, and the level of their liquidity is suspect. So while you may have the added convenience of utilizing the electronic markets, there are velvet handcuffs that can inhibit your risk management techniques if you are not careful.
So while this geared up margin seems great, you still are subjected to both the initial margin and the maintenance margin. This can force you in and out of trades during the day if you are reckless with the number of contracts you are holding when you are geared up.
There are two types of margin: initial margin and maintenance margin. Initial margin is the amount to get into a trade, and maintenance margin is what you need to stay in the trade. Knowing both numbers gives you a clear picture of where you stand. For those with a stock background, futures margin is nothing like stock margin. Your profits and losses are added or subtracted from your margin in real time. The margin that you put up to hold on to a contract is considered a part of your account equity and is treated as such.
Margin is based on volatility and can adjust according to the amount of risk you have in a trade or in your account. As a speculator, you will have to put up the maximum margin required. For instance, if you were to trade the British pound, the initial margin would be 1,480, and the maintenance margin would be 1,100.
Maintenance margin is slightly trickier. Maintenance margin is designed to let your trade have breathing room if the market moves against you. You don’t have to act when your account drops below the initial margin just when the maintenance margin is penetrated. That’s when you have to bring your account back up to initial margin level. This is called a margin call. The easiest way to avoid a margin call is to pick the right trade! In lieu of that, don’t be overleveraged. This is why trading only one mini-contract at a time in the beginning is not a bad idea. This way you can establishing a large enough account reserve as well as track record.
At all costs, you want to avoid a margin call. In fact, you should never put additional money into your account to cover a losing trade. If you feel compelled to do so, you are acting out of desperation and not in your own best interest. In no universe does it make sense to throw good money after bad.