Previously, we introduced the concept of initial margin—the amount you deposit before entering a trade. In this blog, we take things further with variation margin and its impact on your trading positions.
What is the Variation Margin?
Once you place a trade, the market price fluctuates throughout the day. Let’s break this down with an example:
- You buy one ton of aluminium futures at $2,650 per ton.
- At the end of the trading day, the market closes at $2,600 per ton.
- This means your position has lost $50 per ton.
This $50 per ton loss is called variation margin. Your broker will issue a margin call, requesting you to deposit the required amount.
The Role of Margin Calls
The margin call is a crucial mechanism that ensures you have enough funds to cover potential losses. If the market rebounds the next day, returning to $2,650, you will get back the money. This process happens daily, with funds moving in and out of your brokerage account.
However, instead of transferring money daily, some traders keep excess funds with the broker to manage fluctuations more smoothly.
Impact on Credit Lines
Your margin call history plays a role in your reputation as a trader. A strong margin performance can improve your standing when applying for credit lines, which we will cover in our next episode.
Stay tuned for our next episode, where we explore credit lines in trading. Until then, happy trading!