Newbie question
- Thread starter ctrader
- Start date
ctrader,
Margin in futures trading is different than margin in stocks. In stocks, you are actually buying the position and the broker is loaning you part of the purchase price, hence you pay "margin" interest on the amount loaned to you. In futures, you are contractually committing yourself to buy(if long) or sell (if short) the specified commodity on the delivery date. The "margin" you are required to post is just a guarantee that you have the funds necessary to fulfill your commitment. No one is loaning you anything, thus there is no interest payable. In fact, brokers pay you interest on some or all of the cash in your account. Some require you to purchase T-bills and will count a very high percentage of that against your margin obligation.
This subject is confusing and often leads to claims that futures have unreasonably high leverage because the "margin" is not the same as stocks. While related to risk, they are still two entirely different things.
Margin in futures trading is different than margin in stocks. In stocks, you are actually buying the position and the broker is loaning you part of the purchase price, hence you pay "margin" interest on the amount loaned to you. In futures, you are contractually committing yourself to buy(if long) or sell (if short) the specified commodity on the delivery date. The "margin" you are required to post is just a guarantee that you have the funds necessary to fulfill your commitment. No one is loaning you anything, thus there is no interest payable. In fact, brokers pay you interest on some or all of the cash in your account. Some require you to purchase T-bills and will count a very high percentage of that against your margin obligation.
This subject is confusing and often leads to claims that futures have unreasonably high leverage because the "margin" is not the same as stocks. While related to risk, they are still two entirely different things.
I have been swing trading the DOW cash index on paper for awhile now, generating usually 1 but sometimes 2-3 trades a day, holding over night.
A couple questions I have are:
1. Is the DOW index a good proxy for the $5 dow e-mini, should I start paper trading the actual contract?
2. What are the chances that I will lose more (much more) then my margin on deposit at the broker? Normally I would cut losses and run, but what if something really bad happens and I can't get out of a long position. How often (if ever) has this happened on an index futures? I guess 9/11 is what I am thinking about... what kind of a loss did someone incur overnight on a dow contract?
A couple questions I have are:
1. Is the DOW index a good proxy for the $5 dow e-mini, should I start paper trading the actual contract?
2. What are the chances that I will lose more (much more) then my margin on deposit at the broker? Normally I would cut losses and run, but what if something really bad happens and I can't get out of a long position. How often (if ever) has this happened on an index futures? I guess 9/11 is what I am thinking about... what kind of a loss did someone incur overnight on a dow contract?
NO SMART ASS REMARK...DIDN'T KICK EM WHEN HE IS DOWN....JUST A PLAIN OLE GOOD AND SMART INTELLIGENT ANSWER....HALALOOYA!I don't trade the dow e-mini, but I do trade the S&P 500 e-mini (ES). To give you an idea how much you would have lost if long the ES when they closed the market on 9/11, you would have been down 58.5 points, which is equivalent to $2,925 per contract.
I would practice by trading the actual contract. Usually, the futures are more volatile than the cash indexes and you may find that a method that works paper trading the cash index will not work on the futures.
I should clarify that the $2,925 loss per contract is based on the opening price on 9/17.
The other major market spikes that I can remember in the last three to four years have been from surprise interest rate announcements by Greenspan. If I remember right, a couple of those surprise announcements moved the ES by 50 points or so in a matter of seconds. 50 points equates to $2,500 per ES contract.
The other major market spikes that I can remember in the last three to four years have been from surprise interest rate announcements by Greenspan. If I remember right, a couple of those surprise announcements moved the ES by 50 points or so in a matter of seconds. 50 points equates to $2,500 per ES contract.