Calculating Leverage
One of the most powerful aspects of the futures markets is the ability to use leverage to increase your profits or losses. The relatively low margin requirements of futures markets allow you to control large amounts of an underlying commodity with a small amount of money. When creating a system it is imperative to calculate the amount of leverage you will be employing in each trade in each market. Deciding at what rate you will leverage your position can be the difference between a winning and a losing trading system. Calculating leverage can be done in the following manner:
(Price per Volume * Volume per Contract) / (Margin Requirement per contract) = Maximum Leverage Factor
An example calculation for Soybeans can be seen below
($4.50 per bushel * 5000 bushels per contract) / ($900 margin requirement per contract) = 25
Thus you can control up to 25 times the amount of soybeans as you could buy directly with the minimum margin requirement. Using the maximum amount of leverage may not always be the most prudent choice for your trading system. You can reduce your leverage usage by exposing yourself to less contracts or depositing more than the minimum amount of margin per contract.
Note: Many futures contracts are quoted as a multiple
of the price per quantity. For example a Soybean contract may be
quoted as $4500 yet the price per bushel is actually $4.50. The true
value of the contract is still $22,500 worth of soybeans ($4.50 per bushel
* 5000 bushels per contract) and not $22,500,000 ($4500 per bushel * 5000
bushels per contract). This should also be taken into account when
backtesting with data quoted in this manner.
Sample Futures Spec and Leverage Excel Sheet
Futures_Contract_Specs_and_Margin.xls
Download this Excel Spreadsheet to keep track of the margins
and leverage factors on the futures you trade. A sample set of futures
is provided. Please update margins and change formulas where and
when appropriate. All information may not be currently accurate.
Update all info or use at your own risk.
Please contact [email protected] for any additional information