How Leverage Increases Gold Trading Profits and Losses
If you have a 1,200 dollars trading account with leverage 100:1 you as a trader can buy a maximum of 1 lot which is equivalent to 120,000 dollars Gold contract (1 Standard lot).
Let us calculate trading profits and losses based on three examples of used leverage, based on $1,200 XAUUSD trading account:
- 1 lot (100:1)
- 0.5 lots (50:1)
- 0.2 lots (20:1)
NB: This is the Leverage used not the Maximum leverage, If an online Gold broker gives you 100:1 leverage, but you only trade 0.1 lot the used leverage you are using is 10:1, But if you trade 1 contract then the you'll use is 100:1 which is equal to Maximum leverage(100:1).
So the example referred in example below is talking of the leverage used based on the volume of the trade that you have opened.
Example 1: (100:1 Leverage or 1 Lot)
For 1 lot 1 pip equals $ 1
If you make a profit of 100 pips the calculation of profit in dollars is:
1 lot
1 pip = $1
100 pips = 100 * 10 = $100
Total= balance + profit
= 1000+ 100
= $1,100 you have just made 10% profit in your account equity balance.
If you make a loss of 100 pips the loss in dollars is:
1 lot
1 pip = $1
100 pips = 100 * 10 = $100
Total= account balance - loss
Total= 1000 - 100
Total = $ 900 you have just lost 10% of your trading account balance
Example 2 :(50:1 Leverage or 0.5 Lots)
For 0.5 lots 1 pip equals $ 0.5
If you make a profit of 100 pips the profit in dollars is:
0.5 lots
1 pip = $0.5
100 pips = 100 * 0.5 = $50
Total= balance + profit
= 1000+ 50
= $1,050 you have just made 5% profit of & added it to your trading account balance
If you make a loss of 100 pips the loss in dollars is:
0.5 lots
1 pip = $0.5
100 pips = 100 * 0.5 = $50
Total= account balance - loss
Total= 1000 - 50
Total= $950 you have just lost 5% of your trading account balance
Example 3: (Leverage 20:1 or 0.2 Lots)
For 0.2 lots 1 pip equals $ 0.2
If you make a profit of 100 pips the profit in dollars is:
0.2 lots
1 pip = $0.2
100 pips = 100 * 0.2 = $20
Total=balance + profit
= 1000+ 20
= $1,020 you have made lost 2% of your account balance
If you make a loss of 100 pips the loss in dollars is:
0.2 lots
1 pip = $0.2
100 pips = 100 * 2 = $20
Total= account balance - loss
Total= 1000 - 20
Total= $980 you have just lost 2% of your trading account balance
From the above example you can see that the more leverage you use the greater the profit or loss & the less leverage you use the lesser the profit or losses.
It is therefore better to use less leverage so as to minimize the risks involved in online trading of Gold metal. The higher the leverage used the greater the risks. This is one of equity money management leverage rules not to trade with more than 5:1 leverage at any one given time.
In money leverage rules: It is always advisable to stay below 10:1 leverage which is still high, most professional money managers use 2:1 leverage meaning they trade only 2 lots for every $120,000 in their XAUUSD trading account. Therefore, to trade one lot these money managers will have $60,000 as their account equity balance.
As a trader the minimum you should open a XAUUSD trading account with is $10,000 dollars if you'll be trading XAUUSD Standard lots. If you'll be trading XAUUSD Mini Lots then the minimum you should open a Gold trading account with is $1,000 or $2,000.
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