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Why are margins important in trading?

by Thomas
Why are margins important in trading

This is the question that all investors should have clear in their head before starting, why are margins important in trading?

From the emails that come to me I read many difficulties on how financial instruments work, on average reading it is implied that investors refer to derivatives products also because they are those most advertised on social networks with the” promise ” of easy earnings.

Unfortunately, the various brokers do not explicitly tell you what leverage or margin is to maintain an open position but at the bottom of the page it says that between 70 and 80% of those who Trade lose money on the markets. It is written at the bottom of each page because brokers were obliged by the Financial Market Supervisory Authorities.

How come?

Do investors really know the mechanics behind each instrument?

Since several investors are part of those who invest “do it yourself”, they think that with small money 2000/3000 dollars for example to be able to earn large money in a short time.

In my opinion you are more likely to lose money on the market at the small slightest swing, this is why?

Those who work on derivatives (futures, options, CFDs…) must calculate the margin and be aware of the leverage used that can be to our advantage but also to our disadvantage, the goal basically speaking is to have control of risk to protect our portfolio.

Margin is the part of funds needed to open a position with leverage.

When I go to invest I have to consider two types of margin:

* Initial margin used to open an S&P 500 futures contract, for example

* Holding margin is money that must be held in the account to ensure that the position on our future is not closed

Margins can I change at any time?

Yes, check the margin is a key component, for example on Eurex, the largest european market, (options and futures), there is the offcial calculator margin, you will see that there are two ways of calculating the margin, if I open a long position and the other short.

I summarize the importance of margin as the perception of risk in the market, if the market for example asks for a low margin and at that moment there is an important event that happens, the investor risks being discovered. Another way is low margin low risk, big margin big risk.

If the investor is overdrawn comes the famous ” margin call” from the broker, what does it consist of?

There comes a message, an email, a call a notification on our platform where we are asked to add money to keep the position open. If this does not happen our position will be closed.

There is also the margin stop out which is the “automatic” closure by the broker of the operation.

Margin allows to increase the profits and to export through the opening of new positions in fact is calculated on the exposure of the operation and not on the deposit while if the market goes against this is cause of loss of profits.

At the risk management level I always have to keep margin under control because if an important event happens (for example Covid) on the market I have to know what to do, believe me in words it seems easy but when you are in the emergency situation and you do not have much time to make decisions it is very difficult.

One of my tips before opening an account on a platform is to ask if there is a margin calculator.

I advise more and more people not to trade or invest because the financial markets are very difficult, I give an example, imagine you are in the open sea and they tell you that there are sharks in that area, would you swim?

They could swim only and exclusively people who have studied and swam with sharks, they are not situations that you can learn in 2/3 years but it takes at least 10/15 years before you can dive with sharks.

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