in the margin requirements that are set by the exchanges. I discussed the
importance of margin requirements and their function as a good-faith deposit or performance bond in the futures market in Chapter 1 and noted that
exchanges can change those requirements quickly. If you examine the reasons behind the increase or decrease in margin requirements, you will learn
that it is a direct relationship to the expected amount of risk you may assume in that market.
Some analysts believe that when the price behavior is bullish in a
steadily rising market and the exchange raises the margin, it may indicate
that the market is near a top and that a price correction is close. The reason
for this belief is that the higher prices move, the more vulnerable a price
correction would be for smaller investors who would need more trading
capital to afford such losses. So the idea is that if you want to enter a position, then you would need more trading capital.
On the other side of the coin, if the market price of a futures contract is
at an extreme low, the exchange may lower the margin as it concludes the
risk factor is lower. The theory is that when the exchanges lower the margin requirements, it may signal that a market may be near a bottom as it encourages more traders to take more positions. Once again, this is strictly a
theory. However, I personally have seen several monumental market rever sals within days or a week after a margin rate increase and decrease, and I
do watch for margin changes.
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