Explain What is Commodity Trading Leverage? Explain What is Commodities Trading Margin?
The definition of Commodity Trading Leverage is having ability to control a large amount of money using very little of your own money & borrowing the rest - this is what makes the commodities market to attract many investors.
We shall explain commodity leverage first & then explain commodity margin in this learn how to calculate commodities leverage & margin guide.
Example:
We shall us this example to explain what commodity trading leverage is? If your broker gives you commodity leverage of 100:1 (this is best option to select as the maximum commodity leverage for any commodity account)
This means you borrow 100 dollars for every dollar you've in your commodities trading account.
To put in another way your commodity broker gives you 100 dollars for every 1 dollar in your account. This is what is referred to as leverage.
This means if you open an account with $1,000 and your commodities trading leverage is 100 : 1, then you get $100 for every $1 you that you have in your commodity account, the total amount that you will control is:
If for 1 dollar the broker gives you 100
Then if you have 1,000 you'll get a total of:
$1,000 * 100 = 100,000 dollars
Now you control 100,000 dollars of Investment
Most new commodity traders ask what commodity leverage is best commodity leverage for 1,000 dollars, or 2,000 dollars, or 5,000 dollars commodity account? - The best commodity leverage option to choose when opening a live Commodity Trading account is always 100:1 & not 400:1.
What is Commodity Trading Margin?
Commodities Trading Margin is the amount of money required by your broker so that to allow you to continue trading with borrowed amount.
In other words the question what is margin in Commodity Trading? can be explained as money required to cover open commodities trades and is expressed in percentage. For 100:1, the amount you'll control is 100,000 dollars as explained in the above example.
Now can i compare someone investing $1,000 with another one investing $100,000? Obviously Not. This is how it works, it takes you from that guy investing $1,000 to that one investing $100,000. Where does this extra money come from? You borrow from your commodity broker in what is simply known as Leverage. This money which you borrow, you borrow it against the $1,000 dollar of your own money that you deposit with your commodity broker. If you were to explain what this commodity leverage means - then it's the ability to control a big amount of money using very little of your own money & borrowing the rest. Otherwise, if you were trade Commodity Trading without this leverage it would not be as profitable as it is, in fact you can still select not to use leverage, using 1:1 trading leverage option but you would not make money & it would take too long to make any profit.
Example of how to calculate commodity leverage & margin:
Commodity Margin required in this case is 1,000 dollars (your money) if it is expressed as a percentage of 100,000 dollars in your commodity trading account which you control it is:
If commodity leverage = 100:1
1,000 / 100,000 * 100= 1%
Margin required = 1%
(1/100 *100= 1%)
'Trade Forex Trading - Please simplify because I am Beginner'
(Simplify - your capital is $1,000 after commodity leverage you control $100,000 - $1,000 is what percent of $100,000 - it is 1%) that is your margin requirement for your commodity account.
The commodity margin example shown below, the set commodities trading leverage is 100 : 1, the margin which is 1% is $2683.07, therefore the total amount controlled by the trader is: $268,307 - this is because with this leverage the trader has used little of his money & borrowed the rest, with this set at 100:1, trader is using 1% of their capital, this 1% equals to $2683.07, if 1% equals to $2683.07 then 100% is $268,307
Commodities Leverage and Margin Guide
- If = 50:1 Leverage
Then margin requirement = 1/50 *100= 2 %
If you have $1,000,
1,000* 50 = $50,000.
1,000 / 50,000 * 100= 2%
(Simplify - your capital is $1,000 after commodity leverage you now control $50,000 - $1,000 is what percentage of $50,000 - it is 2%) that is your commodity margin requirement
- If = 20:1 Leverage
Then the requirement = 1/20 *100= 5 %
If you have $1,000,
1,000* 20 = $20,000.
1,000 / 20,000 * 100= 5%
(Simplify - your trading capital is $1,000 after commodity leverage you now control $20,000 - $1,000 is what percent of $20,000 - it is 5%) that is your commodity margin requirement
- If = 10:1 Leverage
Then the requirement is = 1/10 *100= 10 %
If you have $1,000,
1,000* 10 = $10,000.
1,000 / 10,000 * 100= 10%
(Simplify - your trading capital is $1,000 after commodity leverage you now control $10,000 - $1,000 is what percent of $10,000 - it is 10 %) that is your commodity margin requirement
What is The Difference Between Maximum Commodities Leverage & Used Leverage?
However, you should note that there is a difference between maximum commodity leverage ( commodity leverage given by your commodity trading broker which is the highest commodity leverage you can trade with if you choose to) & used commodity leverage ( commodity leverage depending on the lots you've opened/open trades). One is the broker's (Maximum Commodities Leverage) & the other is trader's (Used Leverage). To explain this commodity leverage concept we shall use the commodities trading example above:
If your commodity broker has given you 100:1 Maximum Commodities Leverage, but you only open a trade of 10,000 dollars then Used Commodity Trading Leverage is:
10,000 dollars: 1,000 dollars (your money)
10:1
Your have used 10:1 Leverage, but your maximum is still 100:1 Leverage. This means that even if you are given 100:1 Maximum Commodity Trading Leverage or 400:1 Maximum Commodities Leverage, you don't have to use all of it. It is best to keep your used commodity leverage to a maximum of 10:1 but you will still choose 100:1 maximum commodity leverage option for your trading account. The extra commodity leverage will give you what we call Free Commodities Trading Margin, As long as you have some Free margin on your commodity trading account then your trades will not get closed by your commodity trading broker because this margin requirement will remain above required level.
When it comes to commodity trading one of your rules: money management rules on your trading plan should be to use commodity leverage below 5:1.
In the above image example, the trader is using $2683.07, total controlled amount is $268,307, but account equity is $16,116.55, therefore used commodities leverage is ( $268,307 divide by 16,116.55 ) = 16.64 : 1
16.64 : 1 Used Leverage
Commodities Margin accounts allows traders to control a large amount of currency using little of their own while borrowing the rest
Obtaining this commodity trading account will enable you to borrow money from the broker to trade commodity trading lots with.
Amount of borrowing power your trading account gives you what's called 'leverage', & is usually expressed as a ratio - a ratio of 100:1 leverage means you can control resources worth 100 times your deposit amount.
What this means in Commodity Trading terms is that with 1% margin in your commodity account you can control a trade worth $100,000 with a $1,000 deposit.
However, Trading this commodities account increases both potential for trading profits as well as losses. In Commodity Trading you can never lose more than you deposit, losses are limited to your deposits and usually brokers will close a transaction that extends beyond your deposit amount by executing what is known as a margin call. Traders must therefore try to keep their margin level above that required. By using money management rules and keeping your used leverage below 5:1.
