Margin is a minimum amount of cash and/or securites that must be held in a trading account in order to trade a particular market. For example, in order to trade the DAX futures market, a trader must have at least 10,125 Euros in their trading account. For most day trading markets (such as futures, options, and stocks), the margin amount is set by the exchange that offers the market, but for some markets (such as the forex markets) the margin amount is set by the brokerage.
How is Margin Set?
Margin varies from one market to another (even for the same type of market). For example, the margin for the ZC (Corn) futures market is $2,025, but the margin for the ZW (Wheat) futures market is $6,075. Margin amounts vary based upon the volatility of the market, and the tick value of the market. For example, the ZG (Gold) futures market moves approximately 200 ticks per day, and is worth $100 per point, whereas the ZI (Silver) futures market moves approximately 500 ticks per day, and is worth $5,000 per point. As as result of these differences, the margin for the ZG futures market is $4,455, but the margin for the ZI futures market is $10,125.
How is Margin Used?
When a trading account is flat (no active trades), it will have its full amount of margin available for trading. When the trader enters a new trade, the amount of available margin is decreased accordingly. While the trade is active, the margin will remain unavailable as it is being used to cover the active trade. When the trader exits the trade, the margin will become available again, and can then be used to enter a new trade on the same market or any other market. If the balance of a trading account drops below the margin amount required for a particular market, the trader will not be able to enter any new trades on that market until the account balance is increased.
