The Complete Guide to Futures Trading: What You Need to Know about the Risks and Rewards

CHAPTER 7

Knowing Your Margins and Marching Orders

Self-directed traders obviously should know the market they are trading and how to develop their own trading approach to analyze it to make a trading decision. But that's not the complete picture. They also should have a thorough understanding of two important concepts related to the mechanics of trading: margin requirements and order terminology.

TRADING ON MARGIN

Trading on margin in stocks is considered to be somewhat risky, especially for beginning traders. But every trader in the futures market is trading on margin. The difference is that the term margin has a different meaning in these two investment arenas, as the previous chapters suggest.

In stocks, you make a down payment to own shares of stock and must put up at least 50 percent of the value of the shares, a minimum margin requirement established by the Federal Reserve years ago.

In futures, you do not own anything—whether you buy or sell—but are only speculating on the price movement of the market, unless you are hedging your risk. For this right to speculate on how prices might change from your entry point, you must have a sufficient amount of money in your account to assure the marketplace that you will perform your side of the transaction when the time period for the contract expires. This amount of money is typically called margin. It actually should be called a good-faith deposit or a performance bond because that is how it functions, but because margin is the ...