Trading

2 min. reading time
2/18/2019

Margin Utilization: Keep on track with your strategy

Higher risk due to higher margin requirements? No! We explain why the amount of margin does not affect your risk when trading.

Margin Utilization: Keep on track with your strategy

As a result of the recent action by the central European regulator (ESMA) which came into force at the beginning of August 2018, an industry-wide decision was taken to limit the amount of leverage available to retail clients.

Depending on how intensively you have used your account balance in the past, it is likely that you can still implement your usual trading strategy, however (specifically in relation to trade size). The purpose of this email is to help you visualise how to achieve this.

The following comparisons of the margin requirement of a trade before and after the ESMA changes illustrates this more clearly to you.

The examples are based on a CFD/Spread Betting account with balance of £5,000 and are for demonstrative purposes only. Real market situations may differ.


UK100

CFD trading: UK100 is trading at a price of 6,999/7,000. You decide to go long at 7,000 with 5 UK 100 Rolling Mini CFDs.

Spread Betting: UK100 is trading at a price of 6,999/7,000. You decide to go long at 7,000 with a stake of £5 per point.

     
     

Previously, a maximum leverage of 100:1 (or 1%) was available and the corresponding margin requirement was £350.

     

Post-ESMA maximum leverage is now 20:1 (or 5%) and the corresponding margin requirement is £1,750.

In both scenarios, your trade size and exposure to the market remains the same. For example, if the UK100 price rises by 10 points, closing both positions would result in the same profit (£50).


GBP/USD

CFD trading: GBP/USD is trading at a price of 1.29988/1.30000. You decide to go long with 5 GBP/USD Spot Mini CFDs. 

Spread Betting: GBP/USD is trading at a price of 1.29988/1.30000. You decide to go long with a stake of £5 per point.
 

     
     

Previously, a maximum leverage of 100:1 (or 1%) was available and the corresponding margin requirement was $/£650. 

     

Post-ESMA maximum leverage is now 30:1 (3,33%) and the corresponding margin requirement is just under $/£2,167. 

In both scenarios, your trade size and exposure to the market remains the same. For example, if the GBP/USD price rises by 90 points, closing both positions would result in the same profit ($/£450).

 

Brent Crude Oil

CFD trading: Brent Crude Oil is trading at a price of 79.94/80. You decide to go long with 5 Brent Crude Oil Mini CFDs.

Spread Betting: Brent Crude Oil Mini is trading at a price of 79.94/80. You decide to go long with a stake size of £5 per point.
 

     
     

Previously, a maximum leverage of 50:1 (or 2%) was available and the corresponding margin requirement was $/£800. 

     

Post-ESMA maximum leverage is now 10:1 (10%) and the corresponding margin requirement is $/£4,000. 

In both scenarios, your trade size and exposure to the market remains the same. For example, if the oil price rises by $1, closing both positions would result in the same profit ($/£500).

 

In summary: Post-ESMA = Higher Margin but Same Risk

As illustrated above, the ESMA changes have the effect of increasing the margin requirement for opening positions. Your risk in relation to your total available capital remains the same, however. You simply have to allocate more of this available margin to achieve the same market exposure as you did prior to the ESMA changes taking effect.



The above-mentioned market views and content reflect only the opinion of the author, not that of ayondo. This service is for informational purposes only and does not constitute advice or investment advice.