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