Margin trading is an attractive way to improve profitability via the use of borrowed funds, commonly utilized in futures trading. Essentially, it allows traders more size than their current reserve — which in turn allows for the possibility of risk in extremely liquid markets. There’s an opportunity for a substantial profit if used wisely. However, only if you fully understand how and when to utilize such tactics to boost your margin trading strategy with futures markets.
As just a new trader or even a seasoned investor hoping to improve profitability, utilizing margin with futures applications is possible with the correct tactics by your side. Let’s dive into margin trading in futures scenarios and explore the best ways to amplify profitability and limit potential risk.
How Margin Works in Futures Trading
At the core, margin trading simply involves the process of borrowing funds for a broker to wield larger trades than their equity serves. In a futures environment, this borrowed money serves as collateral and allows a trader to exert specific sizes of their trades. The collateral specifies the minimum amount of trading positions exerted, known as the initial margin, so traders can utilize futures contracts without tying down their entire investment.
For example, if you wish to trade a futures contract requiring $100,000, you can use margin to control the trade, possibly requiring $10,000 or less. This allows investors to move with precision and, by extension, increases the potential size of the total trade movement size.
The Advantages of Using Margin in Futures Trading
One of the significant benefits of trading futures is the potential for returns on margin or margin leverage. Futures contracts are a highly leveraged asset class and require little margin to achieve a large trading position size. If used carefully, this can result in a high return on margin if the trade goes in your favor. In addition to returns on margin, trading futures with margin allows your capital to be as productive as possible by allowing for capital diversification of your funds in other futures contracts besides a single future’s position.
That said, trading with leverage increases risk. If the trade moves against you, losses have the potential to accumulate quickly and your broker can issue a margin call. This can occur when you don’t have the margin, or you can’t meet the minimum margin requirements for maintaining the bearish positions in the futures account. The broker has the right to liquidate the position to offset the losses.
Managing Risks in Margin and Futures Trading
When trading futures on margin, risk management is key. Futures markets are notoriously volatile so traders need to be prepared for rapid price changes. To help manage your risk, be sure to:
- Utilize Stop-loss Orders: These automatically get you out of a trade if markets inevitably move against you, effectively reducing your exposure and potential loss.
- Mind Your Margin: Be sure to take note of your brokers margin requirements, as these may change with market conditions. Brokers can (and do) increase their margin requirements during especially volatile times in the market and should you not meet these requirements, you may be faced with a margin call.
Practical Tips for Navigating Futures Markets with Margin
Start Small: If this is your first time trading on margin, start with smaller trade sizes. This lessens your risk and helps you to get a feel for the market.
- Keeping Up to Date: Market moving events can include economic reports and other geopolitical events. Paying attention to these and their releases can give you a leg up in determining how markets are likely to move.
- Adapting as Necessary: The margin requirements from your broker can change because of market events and the overall volatility of a given market. Exercise caution and always ensure that you can indeed pay for your trades, on time and in full before placing a trade.
The Future of Margin Trading in Futures Markets
Leveraging margin trading and staying disciplined in the market will have a significant influence on a trader successfully navigating the futures marketplace. When traders implement a strategic approach to trading and manage risk effectively, margin trading can significantly increase returns to a lucrative margin.
