If you have ever traded anything on margin besides Nadex, you know how disturbing a margin call can be. Even if you’ve never had one, the mere thought of having one may have kept you up at night.
There’s all those little, picky terms to understand like margin call, maintenance margin, initial margin, day trading margin, Reg T margin, portfolio margin etc.. that are hard to understand and remember. Then there are rules on day trading margin and when you have to be out before a broker will force liquidate your position and charge you a fee for the liquidation. Some even charge you for every contract they automatically close.
You may have worried about brokerage fees, margin requirements and brokerage accounts and wondered which portion of your money fit into which part of your account. When you trade products like futures, forex, stocks, ETFs, and even some options strategies, you have to worry about all of these things.
A margin call happens when the excess cash in your initial account falls below a certain amount or percentage, because of changes in the market that you have an order in. It can also happen at a certain time of day, on day trading margin, before the markets close, if you do not have the money to hold the trade into the close on initial or Reg T margin.
There is even a caveat that forewarns you that margins are subject to change based on market conditions and the guidelines set up by the exchange. Whether you’re a rookie or a veteran trader, you already know that market conditions change. So this is not a reassuring thought that the exchanges could increase the capital requirements on you at any time. If you have an order that goes against what you thought would happen, money is taken from your margin account to make up the difference.
Once that happens, the excess cash can quickly be negative and you may receive a call from your broker asking / demanding you to deposit more! Or they may just liquidate your position. If they don’t or can’t liquidate it, (think over night gap, over the weekend gap, flash crash, news etc.,) then you could end up owing more than what you put in your account and be in debt to the broker.
If you would prefer to avoid this scary situation, you can trade the capped risk option products on the Nadex exchange. Nadex offers both spreads and binaries and every product has capped risk! With Nadex, you always know your risk and reward when you enter any trade.
There are no margins to keep you worrying about where to find that extra money you need to suddenly deposit into your account. On Nadex, the full risk is debited up front and the margin is never increased no matter what the market conditions become. You get massive leverage but without uncapped risk. Hence, no margin calls!
If you trade binaries, you always know that your payout will be either 0 or 100. If you want to make more than that, you can trade more contracts, or trade spreads. Spreads, unlike binaries, are not an all or nothing trade. (Note on binaries on Nadex you can exit before expiration to limit loss or capture profits).
Each spread has different width and value which vary from 30 to 1000 ticks/pips wide. All spreads tick in an increment of 1 (1 or .01 or .001 or .0001), so you know your maximum risk upon entry into any trade. If you enter a trade to buy 20 ticks above the floor, your risk will be 20 dollars, will never increase and that is all the margin you have to put up to place the trade. If you enter a trade with the width of 200, your risk and reward will fall somewhere in between 0 and 200.
If you choose a spread with the width of 1000, you know your risk and reward will fall somewhere between 0 and 1000. It is very easy to figure out. There will never be a margin call! When trading on Nadex, you can always exit at any time, until expiration, in order to limit your losses or take your profits. All contracts have defined risk. Since all contracts have a floor and ceiling, you know the amount you can lose or gain.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
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