How Leverage Increases XAUUSD Profits & 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's 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 which you have opened.
Example 1: (100:1 Leverage or 1 Lot)
For 1 lot 1 pip equals $1 dollars
If you make a profit of 100 pips the calculation of profit in dollars is:
1 lot
1 pip = $1 dollars
100 pips = 100 * 10 = $100 dollars
Total= balance + profit
= 1000+ 100
= $1,100 you have just made 10% profit in your 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 dollars
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 dollars
If you make a profit of 100 pips the profit in dollars is:
0.5 lots
1 pip = $0.5 dollars
100 pips = 100 * 0.5 = $50 dollars
Total= balance + profit
= 1000+ 50
= $1,050 you have just made 5% profit of & added it to your trading account balance
If you accrue a loss of 100 pips the loss in dollars is:
0.5 lots
1 pip = $0.5 dollars
100 pips = 100 * 0.5 = $50
Total= trading 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 earn a profit of 100 pips the profit in dollars is:
0.2 lots
1 pip = $0.2
100 pips = 100 * 0.2 = $20 dollars
Total=balance + profit
= 1000+ 20
= $1,020 you have made lost 2% of your account balance
If you accrue a loss of 100 pips the loss in dollars is:
0.2 lots
1 pip = $0.2 dollars
100 pips = 100 * 2 = $20 dollars
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/losses.
It is therefore better to use less leverage so as to minimize the risks involved in online trading of Gold metal. The greater the leverage option used the greater the risks. This is one of equity money management leverage guide-lines not to trade with more than 5:1 leverage at any given time.
In trading leverage guide-lines: It's always recommended 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. Hence, to trade one lot these money managers will have $60,000 as their trading equity balance.
As a gold trader the minimum you should open a XAUUSD 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 dollars or $2,000 dollars.
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