Many traders use support and resistance levels in their work and market analysis. Today we will consider a certain “analogue” of these levels – margin zones, which are known and used by only a few market participants.
Margin zones in Forex they act as a kind of support or resistance levels. Quotes form bounces or make breakouts of levels, and this is the basis for trading in margin zones.
Where do margin zones come from?
Margin zones are designated by the exchange. For example, consider the Chicago Mercantile Exchange (CME), through which the largest volume of trading in options and futures contracts for currencies passes.
Having entered the website of the exchange, in the FX section, you can find the “Options trading in the foreign exchange market” tab.
Next, select the contract of interest and look at the specification in the “Margin” section, for example, for EUR / USD:
Going into the specification of the contract, you can see the start period of its validity, expiration date and the amount of margin security. In our example, the Euro futures are valid from 04.2021 to 07.2021, and the margin level is 2200 USD. This means that to buy an instrument without leverage, you need to have at least 2200 USD on your account.
We calculate the number of points of the margin zone from the beginning of the futures. In the above example, the futures started trading on the third Monday in April. We draw a line at the opening of the candle (opening of the CME exchange).
How to calculate the location of the margin area?
To determine the level, we divide the amount of the collateral (2200 USD) by the cost of one point of the price movement (12.5 USD), we get 176 points. Then we add 10% and we get our margin levels. Adding 10% is necessary to set the level range.
It should be noted that in the terminal, where quotes are indicated with four decimal places, the level will be calculated as 176 + 17.6 = 196.6 points, and in the presence of quotes with five decimal places as 1966 points.
The next step – on the chart, mark +1966 points and -1966 points from the opening price of the trading session of the CME exchange on April 19 (the same third Monday). Thus, we have obtained medium-term margin levels.
They are not quite suitable for intraday trading due to low price volatility. For medium and long term trading, they can be used as support and resistance levels.
New medium-term levels are built after the current contract is closed and with the opening of a new futures contract.
Intraday Margin Levels
For intraday levels, a similar calculation is used, only divided by four. The construction of the levels of the instrument of interest is carried out at the opening price of the first hourly candle at the trading session of the CME exchange. Intraday levels are plotted, as the name implies, on a daily basis.
Application of margin levels in trading
The main currency pairs are suitable for trading at margin levels: USD / CHF, EUR / USD, USD / JPY, GBP / USD, AUD / USD, NZD / USD.
Timeframe: M30, H1, H4, D1.
The trading session for intraday trading is American. Any time is suitable for medium-term trading.
Having considered the current chart with the plotted margin levels, several assumptions can be made:
- Quotes are in an upward trend.
- Margin levels act as support and resistance.
- At this stage, a correction is being formed.
- If the price during the rollback reaches the level of the beginning of the expiration of the futures contract, there is a high probability of a rebound and continued growth.
- The target reference point for the continuation of the upward dynamics is the upper margin level (resistance).
- Having made a purchase on the correction, Take Profit will be at the resistance level (the lower limit of the upper margin level)
- Stop Loss is located below the open price of the futures contract.
- At this stage of the price movement, the sell option can only be considered for a rebound from the upper level.
An example of trading pending orders
When trading pending orders, margin levels are used as reversal levels and are traded on a rebound.
At the upper margin level, a Sell Limit order is placed at the lower border, Stop Loss is placed ten pips above the upper border.
At the lower margin level, a Buy Limit order is placed at the upper border, Stop Loss – ten points below the lower border.
Take Profit in both cases will be at the opening price of the futures contract.
Intraday (short-term) trading strategy
Before the opening of the trading session on the Chicago Mercantile Exchange CME, the margin collateral is calculated, followed by the margin levels.
The number of points is calculated, which is further divided by four, and then marked on the chart relative to the opening price of the first hourly candle. In this case, Sell Stop and Buy Stop breakout orders are used, which are placed at the constructed margin levels.
If one order is executed, the second one is deleted. Stop Loss is placed at the level of the opening price of the first hourly candle. Positions are closed at 21:00 Chicago time. At the next trading session, margin levels are rebuilt.
Building margin levels in relation to futures contracts at first will cause some inconvenience and take time. You will have to independently search for data on futures and margin collateral, calculate the number of points and draw levels on the chart.
After several calculations, all actions are systematized, and it will be easier to build levels. On the Internet, there may be indicators or scripts for the terminal, which will also help in building margin levels.
Traders are often convinced that the market moves in an unpredictable and chaotic manner. They are partially right, but with a thorough study of market movements, you can find certain patterns that the price is subject to, and then use them for your own benefit. As with any trading strategy, trading at margin levels requires studying and “testing” on a demo account before using it on a real one.