Futures Margin: What is it and how does it impact the amount you need to trade?
In the Hunt, margin leverage is like a shield. If it’s too big or heavy, you can’t carry it. If it’s too small, it does more harm than good.
As you know, we are on the Hunt. In the Hunt, margin leverage is akin to a shield. If it’s too big or heavy, you can’t carry it. If it’s too small, it doesn’t protect and gives a false sense of security. We hope you never get close enough to use your shield, but if you do, let it be your best defense.
I was recently asked the following question:
I’m used to trading stocks. What kind of margin are we looking at to trade one of your strategies?
There’s a lot to unpack here. Trading stocks isn’t like trading futures, but the short answer for those of you that need no explanation is: personally, I like to trade with at least 5 to 6x margin in my account, but that is more dependent on the instrument I’m trading than the strategy. Just as every instrument in the market has a different risk profile, every strategy does as well. So when trading a particular strategy, in addition to margin, you have to consider max drawdown, commissions and a buffer based on the profit factor of the strategy. We’ll provide an example of how to do this in a follow-up post. That said, there really is no right answer here. It depends on your trading style and risk tolerance. One thing is certain, there’s a lot to consider and if you don’t understand the short answer, here’s the longer one…
The long answer will be split into two posts. In this post, we’re going to answer the following questions to make sure we’re on the same page:
What is the difference between contract leverage and margin leverage?
What is one E-mini NASDAQ 100 (NQ) contract worth and how do you calculate your contract leverage?
What is the difference between intraday margin, initial margin and maintenance margin?
How do I add intraday margin accounts to a simulated account in NT8?
Where are margin requirements posted for Ninjatrader’s Brokerage?
In a follow up post, we’ll answer the main question: How does margin leverage impact strategy selection and how much do you need to start trading a specific strategy? We’ll also look at how you can use the Micro E-mini Nasdaq-100 futures (MNQ) to help reduce margin exposure.
Let’s get started…
Leverage and Margin
Trading futures is different from trading other assets like stocks. First, pattern day trading (PDT) rules do not apply to futures trading — it’s the wild west. Second, contract leverage is extremely high. Third, intraday margin requirements are extremely low.
Leverage and margin are inextricably linked in trading; the extent to which is dependent on the exchange and broker rules in place for what you are trading. In the same way that every animal has a different walk and temperament, every instrument has a different market flow and associated risk profile. No one is more aware of this than the exchange that offers the instrument and the broker you use to access that exchange. As a result, margin and therefore leverage, are dependent on the instrument you want to trade. In a follow-up post we’re going to look at the best instrument to trade if you want to maximize margin leverage on a $1,000 account. But first, let’s reinforce your understanding of margin and the difference between contract leverage and margin leverage with an example.
What is intraday margin and how does it impact leverage?
Intraday margin refers to a down-payment to the broker so the broker doesn’t lose money if/when your trade goes against you during the day. Intraday margin is the amount you must have on hand with your broker to ‘play the game’. It’s your buy-in. And, it’s the only requirement you must worry about if your position is closed before the end of the trading session. Put another way, as long as you “exit on session close” at the end of every day, the intraday margin will be the only down-payment you need to worry about.
For example, we know that the current intraday margin for the E-mini NASDAQ 100 (NQ) is $1,000 for Ninjatrader’s brokerage, and the NQ is trading at roughly 14,000 points today. With each point in the NQ valued at $20 ($5 per tick and 4 ticks per point), this makes the actual cost for one NQ contract ~$280,000. You are effectively leveraged 280x if you only maintain the intraday margin requirement of $1,000. This is contract leverage — it is the ability to control a large contract value with a relatively small amount of capital. This isn’t the leverage you need to be concerned with, however. The leverage that will impact your account is the leverage you create for yourself or margin leverage.
To demonstrate how intraday margin impacts margin leverage, let’s examine a hypothetical account owned by Joe with a $10,000 balance.
Currently, the intraday margin requirement for an NQ contract is $1,000. As a result, Joe can trade one contract of the NQ using $1,000 of his $10,000 account balance. The remainder is referred to as excess margin. In this case, the excess margin is $9,000. Joe’s margin leverage is calculated by dividing excess margin by the intraday margin requirement so Joe is margin levered 9x ($9,000/$1,000).
Joe could push his margin leverage to an unfavorable extreme by trading 10 contracts. This would increase his intraday margin (buy-in) to $10,000. In this case, Joe is operating at full leverage. If the market moves one tick against Joe, his account would violate the margin requirements.
Brokers have different intraday margin requirements. Some will even use it as a way to get you to open an account, so do your homework. Meanwhile, you can practice trading with intraday margin by adding it to your simulated account in Ninjatrader. You do this by adding a risk profile to your simulated account. You can use the default risk profile to start, but this can be different from Ninjatrader’s actual margin requirements.
Ninjatrader’s actual margin requirements are updated often. You can view them here. This is a screenshot of margin requirements from 1/24/2022.
As you can see, the intraday margin for the NQ is $1,000 and the intraday margin for the MNQ is $100. The next column over is ‘Initial Margin’ and ‘Maintenance Margin’.
What’s the difference between intraday margin and initial or maintenance margin?
If you don’t close your account before the end of the session, your broker has to pay money to the exchange to cover your account. This is referred to as initial margin and maintenance margin. Initial margin and maintenance margin are set by the exchange, not your broker. For the NQ and the MNQ, that’s the Chicago Mercantile Exchange (CME). Again, you only have to worry about initial margin and maintenance margin if you hold an account position when the exchange closes the market: from 4:00 PM – 5:00 PM CST for most CME products. If you plan on holding your account position past the market close, you need to pay the additional margin before 3:45 PM CST to avoid margin calls. If you are trading futures for someone else’s account, they probably want you to be out of all trades by 3:15 PM CST.
As an example:
Currently, the initial margin to carry one contract on the NQ from one session to the next is $16,500. With an initial margin price of $16,500, Joe’s $10,000 trading account will not allow him to carry one contract into the next trading session. If he wants to do this, he needs to add another $6,500 to the account.
Maintenance Margin
Maintenance margin is an extension of initial margin. It is the amount you must maintain on positions carried longer than one day. If Joe carries one contract to the next day, but does not trade on that subsequent day, he will only need to post maintenance margin. Maintenance margin is lower than initial margin. For example, the maintenance margin for one NQ contract based on the screenshot above, is $15,000. That’s $1,500 less than the initial margin.
Summary
To summarize, intraday margin is your daily buy-in to the game of futures trading. It varies by contract and is determined by your broker. Initial margin and maintenance margin are the buy-in for carrying the position into the next trading session and is determined by the exchange.
We also discussed the difference between contract leverage and margin leverage. Contract leverage isn’t as important as margin leverage. The former is the relationship between the value of the contract and how much it costs to control it, the latter tells you how much cushion you have to trade it.
The next question is: How does this impact strategy selection and more importantly, how do you determine how much cushion you need to start trading a strategy? In our follow-up post, we’ll answer this question. We’ll also look at how you can use the MNQ to help reduce margin and improve margin leverage.