Oil Leverage & Margin Trading Explanation and Example

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

Equity : It is total amount of capital you have in your trading 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 positions. As a trader you can not use this amount of money after opening a trade order transaction because you've already used it & it isn't available to you.

In other words, because your oil broker has opened up a position for you using the capital you have borrowed, you must maintain this usable margin for you as a security to allow you to continue using this oil leverage he has given you.

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

However, if you over use oil leverage, this free margin will drop below a certain percent at which your oil broker will have to close all your positions automatically, leaving you with a big loss. The oil broker at this point will automatically close all your open trade transactions because if your open trade positions are left open then your broker would lose the money you would have 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 percent of your crude oil account, in fact 2 percent is recommended.

Difference Between Crude Oil Trading Leverage Set by the Broker & Used Oil Trading Leverage

If the set oil trading leverage ratio is 100:1, it means that you can borrow up to 100 dollars for every dollar that you have in your oil trading 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 even though the leverage option set 100:1 your used crude oil leverage will be the 50:1 or 20:1 that you have borrowed to make a transaction.

Example:

You have 1000 dollars (Equity)

set 100:1

Oil Leverage Used = Amount used /Equity

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

= 100,000/1000

= 100:1

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

= 50,000/1000

= 50:1

If you buy crude oil 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 Choose 10:1 option as the Maximum Oil Leverage? Because to keep within proper risk management rules it is even recommended that investors 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 Leverage. When you borrow capital from anyone or a bank you must maintain a security or collateral to acquire a loan, even if the security is based on monthly deduction from your salary, the same thing with Oil.

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

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

Now if Your Crude Oil Trading Leverage is 100:1

When trading if you have $1,000 & use option 100:1 & buy 1 standard lot for $100,000 your margin on this transaction is the $1000 dollars in your account, this is money that you will lose is your open transaction goes against you the other $99,000 that is borrowed, they will close the open oil transactions automatically once your $1,000 has been taken by the crude oil market.

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

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

For 50% requirement of this level before closing your crude oil trades 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 your open trade positions 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 @@1 pips spread your trading account balance will get to $990 & the needed percent is 100% i.e. 1,000 dollars, therefore your orders will immediately get closed-out.

Most brokers don't set 100% requirement, but there are those that set 100% are not suitable for you at all, select those set 50% or 20% margin requirements, in fact, those who set at 20% are some of the best because the likely hood they closeout your trade is reduced as shown in the examples above.

To know about this level which is calculated by your trading platform automatically - The MT4 Oil Platform will display this as "Oil Margin Requirement", This will be displayed as a percent higher the percentage the less likely your trades are to get closed.

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, used capital is $100

Calculation:

= Capital Used * Percent(100)

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

Oil Trading Margin Requirement = 1,000 %

Investor has 980% above the required 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, used capital is $1000

Calculation:

= Capital Used * Percent(100)

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

Oil Margin Requirement = 100 %

Investor has 80% above required amount

Because when a oil trader has a higher oil leverage means that they have more percentage above what is required(A.K.A. 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 rules, they will not trade above 5:1.

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

MT4 Oil Software