Trade Forex Trading

How Leverage Increases XAU/USD Profits and Losses

With an account size of $1,200 coupled with 100:1 leverage, one is permitted to purchase a maximum volume equivalent to 1 standard lot, which translates to a $120,000 Gold contract value.

Let's quantify potential trading returns and deficits based on three distinct leverage scenarios applied to an account valued at $1,200 for XAUUSD:

  • 1 lot (100:1)
  • 0.5 lots (50:1)
  • 0.2 lots (20:1)

NB: This is the Leverage you use, not the Maximum leverage. If a Gold broker online gives you 100:1 leverage, but you only trade 0.1 lot, then you are using 10:1 leverage. But if you trade 1 contract, then you will use 100:1, which is the Maximum leverage (100:1).

The example below shows leverage based on your gold trade volume. It depends on the position you opened.

Example 1: (100:1 Leverage or 1 Lot)

For 1 lot a pip equals $1 dollars

If you achieve a profit of 100 pips, the calculation of trading profit in dollar terms is as follows:

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 dollar terms 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 a pip equals $0.5 dollars

If you make a profit of 100 pips the profit in dollar terms 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 account balance

If you accrue a loss of 100 pips, the loss in dollar terms 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 dollar terms 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've just lost 2% of your account balance

The chart shows more leverage means bigger profits or losses. Less leverage cuts both gains and risks.

Consequently, it is prudent to utilize less leverage to mitigate the inherent risks associated with online trading of the Gold commodity. Elevated leverage selections correspond directly to heightened risk exposure. A key guideline within equity capital management pertaining to leverage is to abstain from employing more than a 5:1 leverage ratio at any given juncture.

When considering trading leverage, it is advisable to keep it below 10:1, although this is already a significant ratio. Experienced money managers typically employ a more conservative 2:1 leverage, which involves trading two contracts or lots for every $120,000 in their XAUUSD accounts. To trade one lot under these guidelines, they would maintain an equity balance of $60,000.

For trading gold, you should start with at least $10,000 in your XAUUSD account if you plan to trade XAUUSD Standard lots. If you want to trade XAU USD Mini Lots, you should have at least $1,000 or $2,000 in your gold account.

More Tutorials & Tutorials:

XAU/USD Broker

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