Oil Leverage and Margin Explained
The definition of Oil Trading Leverage is having the ability to control a large amount of money using very little of your own money & borrowing the rest - this is what makes the crude oil market to attract many investors.
We shall explain oil leverage first & then explain oil trading margin in this learn how to calculate crude oil leverage & margin tutorial.
Example:
We shall us this example to explain what oil leverage is? If your oil broker gives you oil leverage of 100:1 (this is the best option to choose as the maximum oil leverage for any oil trading account)
This means you borrow 100 dollars for every dollar you've in your crude oil trading account.
To put in another way your oil broker gives you 100 dollars for every 1 dollar in your account. This is what's referred to as crude oil trading leverage.
This means if you open an account with $1,000 & your crude oil leverage ratio is 100:1, then you'll get $100 for every $1 you that you have, the total amount that you will control is:
If for 1 dollar the broker will give you 100
Then if you have 1,000 you will get a total of:
$1,000 * 100 = 100,000 dollars
Now you control 100,000 dollars of Investment
Most new oil traders ask what oil leverage is best oil leverage for 1,000 dollars, or 2,000 dollars, or 5,000 dollars oil trading account? - The best oil leverage option to choose when opening a live crude oil account is always 100:1 & not 400:1.
What's Oil Trading Margin?
Oil Trading Margin is the amount of money required by your crude oil broker in order to allow you to continue trading with amount borrowed.
In other words the question what's margin in Oil Trading? can be explained as the money required to cover open crude oil trades & is expressed in percentage. For 100:1, the amount you will 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 originate from? You borrow from your oil broker in what is simply referred to as Crude Oil Trading Leverage. This money which you borrow, you borrow it against the $1,000 dollar of your own money that you deposit with your crude oil broker. If you were to explain what this oil trading leverage means - then it is the ability to control a big amount of money using very little of your own money & borrowing the rest. Otherwise, if you were trade Oil Trading without this oil trading leverage it would not be as profitable as it is, in fact you can still choose not to use crude oil leverage, using the 1:1 leverage option but you would not make money & it would take too long to make any profit.
Example of how to calculate crude oil trading leverage & margin:
Oil 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 oil account which you control it is:
If oil 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 oil leverage you now control $100,000 - $1,000 is what percent of $100,000 - it is 1 %) that is your margin requirement for your crude oil trading account.
The oil trading margin example explained below, the set crude oil leverage ratio is 100:1, 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 set at 100:1, the trader is using 1% of their trading account capital, this 1% is equivalent to $2683.07, if 1% is equal to $2683.07 then 100% is $268,307
MT4 Transactions Panel - Oil Leverage and Margin Discussed
- If = 50:1 Oil Trading 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 oil leverage you control $50,000 - $1,000 is what percentage of $50,000 - it is 2%) that's your oil trading margin requirement
- If = 20:1 Crude Oil 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 oil leverage you control $20,000 - $1,000 is what percent of $20,000 - it's 5 %) that is your oil trading margin requirement
- If = 10:1 Oil 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 oil leverage you control $10,000 - $1,000 is what percent of $10,000 - it's 10 %) that is your oil trading margin requirement
What is The Difference Between Maximum Crude Oil Trading Leverage & Used Oil Trading Leverage?
However, you should note that there is a difference between maximum oil trading leverage ( oil trading leverage given by your oil broker which is the highest oil leverage you can trade with if you select to) & used oil trading leverage ( oil leverage depending on the lots you have opened/open trades). One is the broker's (Maximum Oil Leverage) and the other is trader's (Used Oil Trading Leverage). To explain this oil leverage concept we shall use the crude oil trading example above:
If your oil broker has given you 100:1 Maximum Oil Trading Leverage, but you only open a trade of 10,000 dollars then Used Oil Trading Leverage is:
10,000 dollars: 1,000 dollars (your money)
10:1
Your have used 10:1 Oil Leverage, but your maximum is still 100:1 Oil Trading Leverage. This means that even if you are given 100:1 Maximum Oil Leverage or 400:1 Maximum Oil Trading Leverage, you don't have to use all of it. It is best to keep your used oil trading leverage to a maximum of 10:1 but you will still choose 100:1 maximum oil leverage option for your trading account. The extra oil leverage will give you what we call Free Crude Oil Trading Margin, As long as you have some Free margin on your oil trading account then your trades will not get closed by your oil broker because this margin requirement will remain above required level.
When it comes to oil trading one of your rules: oil money management guidelines on your trading plan should be to use oil trading 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 oil leverage is ($268,307 divide by 16,116.55) = 16.64 : 1
16.64 : 1 Used Oil Trading Leverage
Oil Trading Margin accounts allows traders to control a large amount of oil trading units using little of their own capital while borrowing the rest
Obtaining this oil account will enable you to borrow money from the broker to trade oil lots with.
The amount of borrowing power your account gives you what is called " oil trading leverage", and 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 Oil Trading terms is that with 1% margin in your oil account you can control a trade worth $100,000 with a $1,000 deposit.
However, Trading this crude oil trading account increases both potential for profits as well as losses. In Oil Trading you can never lose more than you deposit, losses are limited to your deposits & usually brokers will close a transaction that extends beyond your deposited amount by executing what is referred to as a margin call. Oil traders must therefore try to keep their margin requirement level above that required. By using oil money management guide-lines and keeping your used oil trading leverage below 5:1.
