Variation Margin is a type of collateral margin that traders must maintain to cover any changes in the value of the open positions on their portfolio. It is determined by the broker or exchange and it is required to cover any losses that may occur as a result of price changes for the underlying security. In short, the variation margin helps the trader manage their risk.

When the market price of an asset in a trader's portfolio starts to move either up or down, the corresponding variation margin changes to reflect the new market level. If the new price is lower than the original price, the variation margin increases and the trader is required to provide more funds. Similarly, if the new price is higher, the variation margin decreases and the trader will be able to take back some of the funds.

For example, let's say a trader has an open position in a stock worth $400. Due to market movements, the price of the stock falls by 10%, so the value of the holding is now $360. As a result, the variation margin increases by $40, meaning the trader must deposit an additional $40 in their account.

Variation margin is important because it helps keep trades within the trader's risk appetite. In other words, when the risk of the position increases, the corresponding variation margin will also increase, effectively controlling the trader's exposure to risk. In addition, the use of variation margin can help traders find better entry and exit points, as they can react quicker to movements in the price.

Overall, variation margin is an important aspect of trading as it helps traders stay aware of the changing market conditions and adjust their strategy accordingly. It may not be the most glamorous part of trading, but when it comes to risk management and risk mitigation, it cannot be overlooked.