How Does Margin Work on Futures Trading - TRADEPRO Academy TM (2024)

What is Margin?

Margin in trading is often misunderstood as how much money you can borrow to open a trade. However, margin is really the amount of capital YOU must put down to open a new position.

Different markets have different margin requirements. In stock trading, you can decide to use margin and only put down a fraction of the price of the shares you are buying. Or you can choose to pay for the entire trade upfront.

In today’s article, I’ll talk specifically about futures margin. And how does margin work on futures? However, you can also read further on how to buy stocks on margin (click to read article).

I have also created a YouTube video called Futures Margin Explained that you can watch here as well for more details.

While trading futures, you have to use margin to open a position. This means that futures trading is a leveraged product by design.

Where it gets tricky in futures, is there are actually two types of margin:

1. Exchange Margin
2. Broker Margin

Let’s take a look at each before we discuss specific markets in further detail.

Exchange Margin in Futures

Futures are traded on the Chicago Mercantile Exchange (CME for short). This is what we call the exchange. All traders around the world who trade futures on US markets are connected to this exchange. This is why futures are called a “lit marketplace”.

This centralized exchange is just one of six reasons that trading futures are the preferred choice of professionals. Here is a list of the 6 Benefits of Emini Trading for Full Time Income.

The CME maintains the margin for the products they offer for trading. Their list is what we call “full margin” because they do not offer intraday discounts like brokers (more on this in the next section).

Here is an example of the CME exchange margins for the most liquid futures contract in the world, the SP500 futures (Symbol: ES):

From this table we can see that currently, you need to have $11,500 USD in capital with your futures broker to open a single contract trade.

Does margin can sometimes increase in extraordinary volatility. This happened during the COVID market crash, as well as around the 2020 US Presidential election.

As a futures trader, it is critical that you understand where you can find a table of CME Exchange margins. I would recommend going to the CME Website and finding your products for practice.

Now that you understand how and why CMEmargins are maintained and set, it is time to talk about broker margins. The good news is you do not have to put up that much money if you plan to day trade futures.

Broker Margin in Futures

In order for brokers to compete for your trading business, they set more favorable futures margins than the exchanges.

These reduced margins are offered today traders who do not plan to hold their trades while the markets are closed. This is offered because the broker can reduce their risk by liquidating your position before you blow out your account, as the market is open and liquid.

Not all brokers offer reduced margins, and some of them have higher requirements than others.

This is why it is critical to find the right broker for your futures trading style and planned starting balance. Many new traders look just for the cheapest commission. This is the quickest way to spend hours opening an account at a brokerage that doesn’t meet your needs.

At TRADEPRO Academy, we use AMP Futures as our brokerage partner. They offer great commission pricing, low margin requirements, and amazing customer service.

Here is their list of margin requirements for popular futures products:

You’ll notice two margin columns:

1. Day Trade
2. Maintenance

This can be very confusing for new futures traders, but it is actually quite simple.

Let’s take a look at the difference and illustrate with some examples in the next section.

Day Trading vs. Maintenance Margin

If you want to read deeper on this topic, here is an article on Initial Margin vs Maintenance Margin that goes into full detail.

Day trading margin refers to the amount of money you will need in your account to hold the position during market hours.

For futures trading, market hours are:

• Sunday 6 PM EST – Futures markets open for the week
• Monday – Thursday – Futures close for just one hour between 5 PM – 6 PM EST each day
• Friday 5 PM EST – Futures markets close for the week

The futures market is very liquid and trades for 23 hours every weekday. This is different from the stock market which opens at 9:30 AM EST and closes at 4:30 PM EST.

Here is a snippet from the CME website on trading hours for the ES contract:

Day trading margin is the balance required to hold the position while the market is open.

Maintenance margin is what you need to have in order to hold the position during the one-hour markets are closed on the weekdays, or over the weekend.

Here are some examples of increased margin requirements:

1. It is 2 PM EST and you buy one contract of the ES (SP500) futures. You only require $400 USD with AMP brokerage. At 4:55 PM, you will either have to close the trade or have enough money to meet the CME exchange margin of $11,500.
2. It is 6 PM EST in the evening, and you buy 1 futures contract of the ES. You can hold it until 5 PM EST the next day with just a $400 USD margin.

If you plan to swing trade futures, and hold longer than a day trading time frame – you can use the “Micros” contract which costs one-tenth of the margin. Day trade margin for MES (micro-ES) is just $100, and maintenance is $510.

This is why it is critical in futures to manage your positions and to decide if you will be day trading or swing trading because each requires a different amount of capital.

Futures Margin Trading Tips

Trading on margin is a requirement in futures, but that doesn’t mean you have to max out your purchase power on each trade.

In fact, you should practice good risk management and be extra careful at the beginning with a smaller account balance. In our futures trading course, we provide a full scaling guide and how to scale up your account like professional traders.

Here are some tips to manage margin when trading futures:

1. Have $2,000 USD per ES futures contract ratio. Sure it only takes $400 USD to open a trade, but you don’t want to be down to a make-or-break trade. You want to be able to sustain losses, as they are part of the business.
2. Decide if you want to day trade or swing trade. If you are gonna be holding trades into the maintenance margin period often, you will need more capital. In that case, it may be more worthwhile to trade options on ETFs vs futures trading. If you are day trading, futures are perfect for you.
3. Never max out your margin, no matter how badly you want to come back from trade. Always respect the ratio from rule #1. Most often account blows out happen right after you decide to go “all in” and “Yolo” your account. No matter how small the balance in it at the start, always respect it!

That’s it for today, I hope you have found this article helpful to your futures day trading. And hope you got a clear thought about how does margin work on futures?

Margin can be the greatest tool ever or the most harmful thing for your finances. It is important to have a strategy with an edge that is well tested, before diving into live trading.

Good luck, and good trading.

Futures Trading Course >>

If you want to join with us in our live trading room, Check This Out.

If you prefer to trade more passively, check out our newsletter, trade ideas and live analysis in the Elite Trader package here > for Free News Update Click 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 for your own financial situation. TRADEPRO Academy^TM is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.