[caption id="attachment_2172" align="alignright" width="150" caption="Photo by baronsquirrel"][/caption]
Throughout my broking career, I often have clients lamenting that the increase in margins have made it very difficult for them to trade. The local broking firms, under the regulations of MAS, require clients to put up the required margins before they can initiate a position. When I joined the futures broking industry in year 2000, the margins required for 1 lot of SiMSCI is abt 5% or S$2000, but due to the current market volatility it has tripled to almost 15% or the current S$6000 despite the falling contract value.
Increases in margins are often viewed as a hindrance to futures traders seeking to maximise their profits through the use of leverage. The higher the margin requirements, the lesser the leverage.
However, traders must take a step back and look at it at a different light. Margins serve as a check for clients so that they do not over-leverage and lose their entire investment. Say, a trader has S$12,000 in his account, if margins are at 5% of the contract value which is about S$2000 and he choose to maximise his leverage by trading 6 lots of SiMSCI, his account would be wiped out if he had shorted at 2000 and the market rallied to 2100. At 15% margins, he can only trade 2 lots, and had market rallied to 2100, he loses S$4000 and preserves his capital for another trade to be able to recover his losses. Therefore, higher margin requirements is indeed a bitter pill, yet it is for your benefit.
Having said that, clients should not base their trading size according to margin requirements. Successful traders have a strategy and trade according to what their risk level allows them and will not max out their account to maximise their profits.
Source: TheMidnightStar