Oil Leverage & Margin Trading Explanation & Example
Margin required : It is the amount of money your oil broker requires from you to open a position. It is expressed in percentages.
Equity : It is the total amount of capital you've in your account.
Used margin : amount of money in your account which has already been used up when buying a oil trading contract, this contract is the one that's displayed in open trade positions. 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 terms, because your oil broker has opened up a trade transaction for you using the capital you've borrowed, you must preserve this usable margin for your trading account as a collateral to allow you to continue using this oil trading leverage he has given you.
Free margin : amount in your account that you can use to open new trade positions. This is the amount of money in your account that has not yet been oil trading leveraged because you have not yet opened a trade with this money - this is also very important for you as the because it enables you as a trader to continue to hold your open trades as will be explained below.
However, if you over use crude oil leverage, this free trading margin will go below a certain percent at which your crude oil broker will have to close out all your positions automatically, leaving you with a large loss. The crude oil broker at this point stops out all your open trade position because if your open positions are left open they would lose the money that you've borrowed from them.
This is why you should always make sure you've a lot of free margin. To do this never trade more than 5 percentage of your crude oil account, in fact 2 percent is adviced.
Difference Between Oil Trading Leverage Set by the Broker & Used Crude Oil Trading Leverage
If the set crude oil leverage ratio is 100 : 1, it means that you can borrow upto 100 dollars for every dollar which you have in your oil account but you do not have to borrow all the 100 dollars for every dollar you have, but you can decide to borrow 50:1 or 20:1. In this case allthough the leverage option set 100:1 your used oil leverage will be 50:1 or 20:1 that you have borrowed to make a trade transaction.
Example:
You have 1000 dollars (Equity)
Set 100:1
Oil Trading Leverage Used = Amount used /Equity
If you buy crude oil lots equal to 100,000 dollars you'll have used
= 100,000/1000
= 100:1
If you buy oil lots equal to 50,000 dollars you'll have used
= 50,000/1000
= 50:1
If you buy oil lots equal to 20,000 dollars you'll have used
= 20,000/1000
= 20:1
In these 3 cases you can see that allthough the set is 100:1
Used is 100:1, 50:1, 20:1 depending on size of oil lots traded.
So Why not Just Select 10:1 option as the Maximum Oil Trading Leverage? Because to keep within proper risk management rules it's even recommended that traders use less than this?
This question might seem straight forward but it's not, because when you trade you use borrowed money known A.K.A. Oil Trading Leverage. When you borrow trading capital from anyone or a bank you must preserve a security or collateral to get a loan, even if the security is based on monthly deduction from your salary, the same thing with Oil Trading.
In oil trading the security is known as margin. This is capital 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 Oil Trading Leverage is 100:1
When trading if you have $1,000 and use trading leverage ratio 100:1 and buy 1 standard lot for $100,000 your margin on this transaction is $1000 dollars in your account, this is the money which you will lose if your open trade transaction goes against you, the other $99,000 that is borrowed, they will stop out the open oil trade transactions automatically once your $1,000 has been taken by the oil market.
But this is if your oil broker has set 0% Crude Oil Trading Margin Requirement before closing out your crude oil trades automatically.
For 20% requisite before closing out your crude oil transactions automatically, then your trades will be closed once your 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 positions automatically, then your trade will be closed once your account trading balance gets to $1,000: Meaning the trade will close-out as soon as you execute it because even if you were to pay 1 pip spread your account balance will get to $990 and needed percentage is 100% i.e. 1,000 dollars, therefore your orders will immediately get stopped out.
Most brokers don't set 100% requirement, but there are those who set 100% aren't suitable for you at all, select those set 50% or 20% margin requirements, in fact, those brokers who set it at 20% are some of the best since due to the likely hood they stop out your trade transaction is reduced as shown in example above.
To know about this level which is calculated by your trading software automatically - The MT4 Oil Platform will display this as "Crude Oil Trading Margin Requirement", This will be shown as a percent the higher the percent the less likely your positions are to get stopped out.
For Example if
Using 100:1
If oil leverage is 100:1 & you transact oil lots equal to $10,000
$10,000 dollars divide by 100:1, your used trading capital is $100
Calculation:
= Capital Used * Percent(100)
= $1,000/$100 * Percentage(100)
Crude Oil Trading Margin Requirement = 1,000 %
InvestorTrader has 980 percent above requirement amount
Using 10:1
If oil leverage is 10:1 & you transact oil lots equal to $10,000
$10,000 dollars divide by 10:1, your used trading capital is $1000
Calculation:
= Capital Used * Percent(100)
= $1,000/$1000 * Percentage(100)
Crude Oil Margin Requirement = 100%
Investor has 80% above the required sum
Because when one has a higher oil trading leverage means that they have more percent above what is required(A.K.A. More "Free Crude Oil Trading Margin") their open oil trading transactions are less likely to get closed. This is the reason why investors will choose the ratio 100:1 for their trading account but according to their money management trading guidelines, they will not trade above 5:1 leverage ratio.
These Areas are Shown on The Software Screen-Shot Below as an Examples:
MetaTrader 4 Crude Oil Trading Software
