Oil Leverage & Margin Trading Explanation and Example

Margin required : It's amount of money your broker requires from you to open a position. It is expressed in percents.

Equity : It's total amount of capital you have in your account.

Used margin : amount of money in your account that has already been used up when buying a oil contract, this contract is the one that's displayed in the open trades. As a trader you can not use this amount of money after opening a trade order transaction because you have already used it & it isn't available to you.

In other words, because your broker has opened up a trade transaction for you using the capital you have borrowed, you must preserve this usable margin for your account as a collateral to allow you to continue using this leverage he has given you.

Free margin : amount in your account which you can use to open new trade positions. This is amount of money in your trading account that hasn't yet been leveraged because you've not yet opened a trade with this money - this money also is very important for you as a trader because it enables you as a trader to continue holding your open transactions as will be explained below.

However, if you over use leverage, this free margin will drop below a certain percentage at which your broker will have to stop out all of your transactions automatically, leaving you with a big loss. The broker at this point will automatically close-out all your open trades because if your open trades are left open then your broker would lose money that you would have borrowed from them.

This is why you should always make sure you've a lot of free margin. ToIn-order-to do this never trade more than 5 % of your crude account, in fact 2 % is recommended.

Difference Between Trading Leverage Set by the Broker and Used Trading Leverage

If the set leverage option is 100:1, it means that you can borrow up to 100 dollars for every dollar that you have in your account but you don't have to borrow all the $100 for every dollar you have, but you can decide to borrow 50:1 or 20:1. In this case even though the leverage option set 100:1 your used crude leverage will be the 50:1 or 20:1 that you have borrowed to make a trade transaction.

Example:

You have $1000 (Equity)

Set 100:1

Oil Leverage Used = Amount used /Equity

If you buy oil lots equal to $100,000 you'll have used

= 100,000/1000

= 100:1

If you buy crude trading lots equal to 50,000 dollars that as a trader you'll have used

= 50,000/1000

= 50:1

If you buy crude trading lots equal to 20,000 dollars that as a trader you'll have used

= 20,000/1000

= 20:1

In these three cases you can see that even though the set is 100:1

The used is 100:1, 50:1, 20:1 depending on the size of oil lots traded.

So Why not Just Select 10:1 option as the Maximum Leverage? Because to keep within proper risk management rules it is even recommended that investors use less than this?

This question may seem straight forward but it's not, because when you trade you use borrowed money known A.K.A. Oil Leverage. When you borrow capital from anyone or from a bank you must sustain a security or collateral to acquire a loan, even if the collateral is based on monthly deductions from your own salary, the same thing with Oil.

In oil the security is known as margin. This is the capital that you deposit with your broker.

This is calculated in real-time as you trade. To keep your borrowed amount you must preserve what is known-asreferred-to-as the required capital (your deposit).

Now if Your Trading Leverage is 100:1

When trading, if you have $1,000 & use leverage ratio 100:1 & buy one standard lot for $100,000 your margin on this trade transaction is the $1000 dollars in your trading account, this is money which you'll lose if your open trade transaction moves against you the other $99,000 that's borrowed, they will stop out the open trade transactions automatically once your $1,000 has been taken by the crude market.

But this is if your broker has set 0 percent Oil Margin Requirement before closing out your crude trades automatically.

For 20 % prerequisite before closing out your crude oil transactions automatically, then your trades will be closed once your trading account trading balance gets to $200

For 50 % requisite of this level before stopping out your crude oil positions automatically, then your trades will be closed once your account trading balance gets to $500

If they set 100% requirement of this level before closing out your open trade transactions automatically, then your trade will be closed once your account trading balance gets to $1,000: Explanation the trade will close-out as soon as you the trader execute it because even if you as a trader you pay One pips spread your trading account balance will get to $990 and the needed percent is 100 percent i.e. 1,000 dollars, therefore your trading orders will immediately get stopped out-out.

Most brokers don't set 100% requisite, but there are those that set 100% aren't suitable for you at all, select those set 50% or 20 percent margin requirements, in fact, those who set at 20% are some of the best since due to the likely hood they stop out your trade transaction is reduced as shown in the examples above.

To know about this level that is calculated by your platform automatically - The Meta Trader 4 Oil Platform will show this as "Oil Margin Requirement", This will be displayed as a percent higher the percentage the less likely your positions are to get closed out.

For Example if

Using 100:1

If leverage is 100:1 & you transact oil lots equal to $10,000

$10,000 dollars divide by 100:1, used capital is $100

Calculation:

= Capital Used * %(100)

= $1,000/$100 * %(100)

Oil Trading Margin Requirement = 1,000 %

Investor has 980 percent above the required amount

Using 10:1

If leverage is 10:1 & you transact oil lots equal to $10,000

$10,000 dollars divide by 10:1, used capital is $1000

Calculation:

= Capital Used * %(100)

= $1,000/$1000 * %(100)

Oil Margin Requirement = 100 percent

Investor has 80% above the required sum

Because when one has a higher leverage means that they have more percentage above what is required (A.K.A. Known As More "Free Oil Trading Margin") their open oil transactions are less likely to get closed. This is reason why traders will choose option 100:1 for their account but according to their risk management trading rules, they won't trade above 5:1 leverage ratio.

These Levels are Shown on The Software Screen-Shot Below as an Example:

MT4 Oil Software