Trade Size & Margin in Commodities - text
Every commodity is measured in its own unit. Here is an example of the units for some of the most popularly traded commodities:
For example, crude oil is traded in barrels, so in our order box the ‘amount’ is the number of barrels we want to buy or short sell.
In this example we will be buying 50 barrels of crude oil at $45 per barrel
If we were to purchase 50 barrels of oil* without any leverage it would cost us $2,250.00 at its current price (50 X $45).
However, with the use of leverage we do not need that amount of cash in our balance to open a position of this size. Our broker will lend us the money for our position and we just put down a margin requirement.
So say the leverage for crude oil is 100:1. This is the same as saying the margin requirement is 1% i.e. we only have to put down 1% of the position size and our broker will lend us the rest to open this position.
Therefore, a position of 50 barrels of crude oil that costs $2,250.00, the margin requirement is $22.50 (1% of $2,250.00). This is all we would need in our account to open this position.
As all commodities are quoted in dollars, If we had a trading account in a different currency denomination then this $22.50 would be converted to our currency at the current exchange rate.
Let’s look at another example using gold as our instrument. Gold is measured in Troy ounces so in our ‘amount’ box we would enter how many ounces we would like to buy or sell. Let’s say we would like to short sell 10 ounces of gold.
In our order box we see the current market price for gold is $1,150.00 per ounce. Therefore if we were to short sell 10 ounces of gold without leverage the position would cost us $11,500.00 (10 X $11,500.00).
So say the leverage for gold is 200:1. This is the same as saying the margin requirement is 0.5% i.e. we only have to put down 0.5% of the position size and our broker will lend us the rest to open this position.
Therefore for a position on gold of 10 ounces at the current market rate of $1,150.00 our margin requirement would be $57.50 (0.5% of $11,500). This is all we would need in our account to open this position.
This method can be applied to all commodities and you can find the leverage for each instrument in trading conditions On AvaTrade.com.