Margin and Notional Trading Requirements...
In order to open a trade you must have a minimum amount of free capital in your account. Any spread betting company will insist on this so you can cover potential losses.
This sum of money is know as Margin or Initial Margin Requirement.
For example: You want to enter into a long trade on the Dow Jones September contract at £1 per point. The spread betting company will only let this occur providing you have at least £400 free in your account.
The sum required is £400 for this particular market because the Notional Trading Requirement (or NTR) is 400. In other words, you must have 400 times your stake per point available to cover the margin.
If you do not have £400 spare, you will not be able to trade the Dow at £1 per point.
The more volatile a market, the larger the NTR will be.
Once you are actually in a trade, Variation Margin is also applied to your account.
For example: You have a total trading pot of £10,000. You decide to open a trade on the Dow at £2 per point. The next day your trade is losing 55 points, your account looks like this:
Total Cash: £10,000
Initial Margin Requirement: -£800
Variation Margin (current profit/loss): -£110
Total available trading capital: £9,090
Due to the fact that you are in a position, you currently only have £9,090 free to trade with. The rest of your capital is tied up in the Dow trade.
If you were to close your position now and lose £120 in the process (taking into account the spread), your account would look as follows:
Total Cash: £9,880
Initial Margin Requirement: £0
Variation Margin (current profit/loss): £0
Total available trading capital: £9,880
When a position moves in your favour, your current profit is added to the variation margin. However, when it is moving against you, the loss is removed from the variation margin.
The sum of your total cash, initial margin requirement and variation margin gives your Total Available Trading Capital.
If this sum becomes negative the spread betting company will ring you to ask you to make it positive again. This can be done by either cutting the position, part closing it or adding more funds to your account.
This action is known as a Margin Call.
If you do not respond to this, the bookmaker will close your trade and the loss will be applied to your account. It is very important that you trade within your means or you could lose all of your capital very quickly.
Your Total Available Trading Capital will determine the maximum stake per point you can trade for each particular market.
If this is currently £4,000 and you want to trade the Gold August contract (NTR of 200) then your maximum stake would be £4,000 divided by 200 = £20 per point.
Please note though that if you then place this trade and the position moves against you, you may receive a margin call.
It is sensible when trading to make note of the NTR and use this as part of your money management plan.
Next Page - Money Management...