Leverage in Commodity Trading Explain What is Commodities Trading Margin?
The definition of Commodity Leverage is having the ability to control a big amount of money using very little of your own money & borrowing the rest - this is what makes the commodity market to attract many traders.
We shall explain commodity leverage first & then explain commodity margin in this learn how to calculate commodities trading leverage & margin commodity tutorial.
Commodity Trading Example:
We shall us this commodities examples to explain what commodity trading leverage is? If your commodity broker gives you commodity leverage ratio of 100:1 (this is the best option to select as the maximum commodity leverage for any commodity trading account)
This means you borrow 100 dollars for every dollar you have in your commodity account.
To put in another way your commodity broker gives you 100 dollars for every 1 dollar in your commodities account. This is what is referred to as commodity trading leverage.
This means if you open a commodity trading account with $1,000 & your commodity leverage is 100:1, then you get $100 for every $1 you that you have in your commodity account, the total amount which you will control is:
If for 1 dollar the broker will give you 100
Then if you have 1,000 in your commodities account you'll get a total of:
$1,000 * 100 = 100,000 dollars
Now you control 100,000 dollars of Capital after commodity leverage
Most new commodity traders ask what commodity leverage is best for 2,000 dollars, or 5,000 dollars, or 10,000 dollars commodity account? - The best commodity leverage ratio to choose when opening a live Commodity Trading account is always 100:1 and not 500:1.
What's Commodities Trading Margin?
Commodities Trading Margin is the amount of money required by your commodity broker so as to allow you to continue commodity trading with the borrowed amount - leveraged amount.
In other words the question what is margin in Commodity Trading? can be explained as the money required by your commodity broker to cover open commodities trades and is expressed as a percentage. For 100:1 leverage, the amount you will control is 100,000 dollars as explained in the commodity example above.
Now can you compare an investor investing $1,000 with another investor investing $100,000? Obviously Not. This is how leverage works in commodity trading, 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's simply known as Commodity Trading Leverage. This money that you borrow from your commodity broker, you borrow it against the $1,000 dollar of your own money that you deposit with your commodity broker in your commodity account. If you were to define what this commodity leverage means - then leverage is the ability to control a large amount of money using very little of your own money and borrowing the rest. Otherwise, if you were trade commodity without this commodity leverage it would not be as profitable as it is, in fact you can still choose not to use commodity leverage, using the 1:1 leverage ratio but you would not make money it would take too long to make any commodity profit.
Example of how to calculate commodities trading leverage & commodity trading margin:
Commodity Trading 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 ratio = 100:1
1,000 / 100,000 * 100= 1%
Commodities Trading Margin required = 1%
(1/100 *100= 1%)
"Trade Forex Trading - Please simplify because I am a Commodity Trading Beginner"
(Simplify - your commodity 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 commodity margin requirement for your commodities trading account.
The commodity trading margin example shown below, the set commodity leverage ratio is 100:1, the commodity 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 and borrowed the rest, with this leverage ratio set at 100:1, the trader is using 1% of their capital, this 1% equals to $2683.07, if 1% equals to $2683.07 then 100% is $268,307
What Is Commodity Trading Leverage for Commodity Trading Beginners? - Do You Have To Use Leverage in Commodity Trading?
- If = 50:1 Commodity Trading Leverage Ratio
Then commodity margin requirement = 1/50 *100= 2%
If you have $1,000,
1,000* 50 = $50,000.
1,000 / 50,000 * 100= 2%
(Simplify - your commodity trading capital is $1,000 after commodity leverage you now control $50,000 - $1,000 is what percentage of $50,000 - it is 2 %) that's your commodity trading margin requirement
- If = 20:1 Commodities Leverage Ratio
Then the commodity margin requirement = 1/20 *100= 5 %
If you have $1,000,
1,000* 20 = $20,000.
1,000 / 20,000 * 100= 5%
(Simplify - your commodity trading capital is $1,000 after commodity leverage you now control $20,000 - $1,000 is what percent of $20,000 - it's 5 %) that's your trading commodity margin requirement
- If = 10:1 Commodities Leverage Ratio
Then the commodity trading margin percent level 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 commodity capital is $1,000 after commodity leverage you now control $10,000 - $1,000 is what percent of $10,000 - it's 10 %) that is your commodity margin requirement
What is The Difference Between Maximum Commodities Trading Leverage & Used Commodity Trading Leverage?
However, you should note that there is a difference between maximum commodity leverage (trading commodity leverage given by your commodity broker which is the highest commodity leverage ratio you can trade with if you choose to) and used commodity leverage ( commodity leverage depending on the commodity lot size you have opened - open trade lots positions). One is the broker's (Maximum Commodities Leverage Ratio) & the other is commodity trader's (Used Leverage Ratio). To explain this trading commodity leverage concept we shall use the commodity example above:
If your commodity broker has given you 100:1 Maximum Commodities Leverage Ratio, 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 Commodities Trading Leverage Ratio, but your maximum leverage ratio is still 100:1 Leverage. This means that even if you're given 100:1 Maximum Commodities Trading Leverage Ratio or 500:1 Maximum Commodities Trading Leverage Ratio, you do not have to use all of it. It is best to keep your used commodity leverage ratio to a maximum of 10:1 commodity leverage but you will still select 100:1 maximum commodity leverage ratio for your commodity 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 commodities trades will not get closed by your commodity broker because this margin requirement will remain above the required level based on the free margin in your commodity account.
When it comes to commodities trading - one of your rules: commodity money management rules on your commodity trading plan should be to use commodity leverage ratio of below 5:1.
In the above commodity example, the trader is using $2683.07, the total controlled amount is $268,307, but commodity trading 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 Commodity Trading Leverage Ratio
Commodity Trading margin accounts allow commodities traders to control a big amount of currency using little of their own money while borrowing the rest
Obtaining this commodity margin trading account will enable you to borrow money from the broker to trade commodity lots with.
The amount of borrowing power your margin commodity account gives you what's called "leverage", and is usually expressed as a ratio - a leverage ratio of 100:1 means you can control resources worth 100 times your deposit.
What this means in commodity trading terms is that with 1 % margin in your commodity account you can control one standard commodity lot or 1 commodity contract worth $100,000 with a $1,000 deposit.
However, trading on this margin commodity trading account increases both potential for commodity profits as well as commodity losses. In commodity trading you can never lose more than you invest, commodity losses are limited to your deposits and usually commodity brokers will close a commodity trade transaction that extends beyond your deposit amount by executing a commodity trading margin call. Commodity traders must therefore try to keep their commodity margin level above that required by their commodity broker. By using commodity money management rules & keeping your used commodity leverage ratio below 5:1.
What Is Commodity Trading Leverage for Commodity Trading Beginners? - Do You Have To Use Leverage in Commodity Trading? - Leverage in Commodity Trading - Commodities Leverage Example - Commodity Trading Leverage And Margin Explained - Commodities Trading Leverage Calculator
