Trade Forex Trading

How to Calculate Leverage & Margin in Gold Trading

The meaning of Leverage is having the ability to control a large amount of money using very little of your own money and borrowing the rest - this is what makes the online Gold trading market to attract many traders and traders.

Example:We shall us this example to explain what leverage is? If your broker provides you leverage ratio of 100:1 (this is the best option to choose & select as the maximum for any account that you will be trading with)

This means you borrow $100 for every $1 you have on your XAUUSD trading account.

To put in another way your broker gives you $100 dollars for every 1 dollar on your account. This is what is known as leverage.This means if you open an account with $20,000 & your leverage option is 100:1, then your get $100 dollars for every $1 you have, the total amount of capital you'll control after deploying leverage is applied is:

If for 1 dollar the broker gives and provides you $100 dollars

Then if you have 20,000 you'll get a total of:

$20,000 * 100 = 2,000,000 dollars

Now you control 2,000,000 dollars of Investment

Most new Gold traders ask what leverage is best for 20,000 dollars, or $50,000, or $100,000 dollars account? Best option to choose when opening a live Gold account is always 100:1 and not 400:1.

What's Margin?

Margin is the amount of money required by your broker to allow you as a trader to continue to trade with the borrowed amount.In other words the question what is margin in Gold trading? Can be explained as the money required to cover open Gold trades and is denoted/expressed in percentage. For 100:1, the amount you'll control is 2,000,000 dollars as expounded in the above illustration.

Now can you compare someone investing $20,000 with another one investing $2,000,000? Obviously Not. This is how it works; leverage takes you from that guy investing $20,000 to that one investing $2,000,000 or from that one investing $50,000 to that one investing $5,000,000. Where does this extra money come from? You borrow from your online broker in what is simply known as Leverage. This money which you as a gold trader borrow, you borrow it against the $20,000 of your own which you deposit with your online broker. If you were to explain what this means - then it is the ability to control a large amount of money using very little of your own money & borrowing the rest. Otherwise, if you were trade XAUUSD without this leverage it would not be as profitable as it is, in fact you as a gold trader can still choose and select not to use leverage when trading XAUUSD, using the leverage 1:1 option - but you would not make money, it'd take too long to make any profit. In online trade leverage is what makes trading in financial trading instruments profitable.

Explanation of how to calculate leverage:

Margin required in this case is 20,000 dollars (your money) if it is denoted/expressed as a percent of 2,000,000 dollars which you control it is:

If leveraging = 100:1

20,000 / 2,000,000 * 100 = 1%

Margin required = 1 %

(1/100 *100 = 1%)

"TradeForex- Please simplify because I am a Beginner Trader Trader"

(Simplify - your capital is $20,000 after applying leverage you control $2,000,000 - $20,000 dollars is what % of $2,000,000 - it's 1%) that is your trading margin requirement.

In the example illustration below, the set leverage option is 100:1, the margin which's 1 % is $2683.07, henceforth the total amount controlled by the Gold trader is: $268,307 - this is because with leverage the trader has used little of his money & borrowed the rest, with this leverage set at 100:1, the Gold trader is using 1 percentage of their capital, this 1 % is $2683.07, if 1 % is $2683.07 dollars then 100% is $268,307 dollars.

How to Calculate Leverage & Margin in Gold Trading

MT4 Transactions Panel Window - Online Trading Platform Software for Transacting Gold and Currencies

If leverage = 50:1

Then margin requirement = 1/50 *100= 2%

If you have $20,000,

20,000* 50 = $1,000,000.

20,000 / 1,000,000 * 100 = 2%

(Explain - your trading capital is $20,000 dollars after applying leverage you control $1,000,000 - $20,000 dollars is what % of $1,000,000 - it's 2%) that's your account margin requirement

If leverage = 20:1

Then the margin requirement = 1/20 *100= 5%

If you've got $20,000 dollars,

20,000* 20 = $400,000.

20,000 / 400,000 * 100 = 5%

(Explain - your trading capital is $20,000 dollars after applying leverage you control $400,000 - $20,000 dollars is what % of $400,000 - it's 5%) that's your trading margin requirement

If leverage = 10:1

Then margin requirement = 1/10 *100= 10%

If you've got $20,000 dollars,

20,000* 10 = $200,000 dollars.

20,000 / 200,000 * 100 = 10 %

(Simplify - your capital is $20,000 after applying leverage you control $200,000 - $20,000 dollars is what % of $200,000 - it's 10%) that is your trading margin requirement

What is The Difference Between the Maximum Leverage & the Used Leverage

However, you should note that there is a difference between maximum leverage (leveraging given by your online broker which's the highest leverage you as a Gold trader can trade with if you choose to) and used leverage (leveraging depending on the lots you've opened/open positions). One is the broker's set leverage (Maximum leverage) & the other is the trader's leverage used (Used leverage). To explain this particular concept we will use the example above:

If your broker has assigned you 100:1 Maximum leverage, but you only open lots of $100,000 then Used leverage is:

$100,000 dollars (1 lot): $10,000 (your money)

Used leverage - 10:1

Your have used leverage 10:1, but your maximum is still 100:1. This means that even if you're given 100:1 Maximum or 400:1 Maximum, you don't have to use all of it. It's best to keep your used leverage to a maximum of 10:1 but you'll still choose 100:1 max option for your account. The extra leverage gives you what we refer to as Free Margin, As long as you have Free margin on your trading account then your trade positions will not get stopped out by your broker because this margin requirement will remain above the required margin level. If your free margin falls below the required level then your online broker will have no choice but to close out all your open trades using what is referred to as a margin call. Having enough free margin will prevent your trades from getting closed due to and because of your account getting a margin call.

In trading Gold one of your rules: money management guidelines on your XAU USD plan should be to use leverage below 5:1. In the above screen shot example, the trader trading currencies USDCAD and GBP/CHF is using $2683.07, as their margin the total controlled leveraged amount is $268,307 dollars, but trading equity is $16,116.55, therefore used leverage is ($268,307 divided by 16,116.55) = 16.64 : 1Used leverage 16.64 : 1

We've used the illustration of a gold trader trading currencies, now download the MT4 software platform, open a practice trade account and open 1 lot of Gold & determine the leverage that's used to open that trade position.

Leverage & Trading Gold Lots

In XAUUSD trade - xauusd is traded and transacted as lots, commonly known as lots. 1 contract or 1 lot of Gold is made up of 100 units of XAUUSD. 1 unit of Gold is the Ounce. Hence, 1 lot of XAUUSD is equal to 100 Ounces of XAU/USD.

If the price of Gold is $1200 dollars per ounce, trading 1 lot of XAUUSD equivalent to 100 ounces of Gold means that a gold trader will be trading a lot worth $1,200*100= $120,000 dollars. Therefore, 1 XAUUSD lot will be equal to $120,000 dollars - to trade this 1 lot a gold trader with leverage ratio 100:1 only requires to have $1,200 as their margin & then borrow the rest using leverage from their online broker.

Margin accounts allows traders to control a large amount of currency using little of their own money while borrowing the rest. Obtaining this account will enable you to borrow money from your broker to trade Gold lots with; the lots of Gold are worth about $120,000.

The amount of borrowing power your account provides you what's called "leverage", & is generally represented as a ratio - a ratio of 100:1 means that you as a trader can control resources worth 100 times your deposited amount or the balance amount on your account.

What this means in trading terms is that with 1% margin in your account you can control a position worth $120,000 dollars with a $1,200 deposited amount.

However, trading this account increases both the potential for making profits and also losses. In online you as a trader can never lose more than you invest, losses are limited to your deposits & generally brokers will close out a trade which extends beyond your deposit amount by executing what is referred to as a margin call. Traders must hence try to keep their margin level above that which is required by their online broker. By using money management rules and keeping your used leverage below 5:1, then as a trader can learn how to manage this & keep your risks to a minimum.

Update: in online you can lose more than you deposit with some brokers; that's why when opening an account you should look for a Negative Balance Protection Policy (NBP), this policy means you can't lose more than you deposit.

Advantages of Leverage Option

As mentioned above, this type of trading account provides you more buying power & the potential for more profits or losses. How this works is; a 1% margin allows you to control a trade position size of $2,000,000 with $20,000. When you open a transaction with $2,000,000 small market changes in the price of the Gold metal can result in big profits or losses.

Gold movements are measured using points referred to as pips. For illustration, US dollar, is transacted in units down to 2 decimal places, the last decimal point is called a pip. The price quote of XAU/USD is seen as $1200.50 dollars - When you're trading 1 lot of $120,000 dollars then each pip is worth $1 profit. So if this price moves up 1 pip to $1200.51 you'll make $1 profit. $1 change in the price of XAUUSD is equivalent to 100 pips, if a XAUUSD moves by $3 dollars (300 pips) in one day, you make $300, if this move is against you, then you lose $300.

Supposing you now decided to use more leverage & trade 10 lots of Gold at once - When you're 10 lots of $120,000 dollars then each pip is worth $10 profit. So if this price moves up 1 pip to $1200.51 you'll make $10 profit. $1 change in the price of XAUUSD is equivalent to 100 pips, if a XAUUSD moves by $3 dollars (300 pips) in one day, you make $3000, if this move is against you, then you lose $3,000.That it is not best to open positions with $1,200,000 dollars - (10 lots of $120,000 = $1,200,000 dollars of opened trade positions) just because you can as a trader, but you can open positions of $120,000 or $240,000 as the maximum so that a 1 dollar move you'll make $100 or $200 dollars respectively & if the move is against you - you only lose $100 or $200 dollars respectively and not a lot in terms of your account equity. There is also the method of money management guidelines/techniques & risk management topics that traders will learn on the next tutorials so as to understand more about leverage & also learn how to trade with leverage in a manner that will help them make profits in the long term.

If price shifts from 1200.00 to 1200.50 which is a difference of 50 pips which represents a profit of $50. Without leverage if you had $20,000 dollars of currency, the price change of 1200.00 to 1200.50 represents difference of $0.5 profit. So the benefit of this online XAUUSD trading is increased profit potential, your trading profit factor is multiplied by 100 or by 50 or by 20 depending and based on the total trading leverage used.

You don't require or need a scientific/math calculator for these calculations, these levels are calculated and displayed & shown by many of the trading platforms, e.g. in MT4 these levels are shown under the transactions window (Press CTRL+T on your keyboard to access it while your MT4 is open) these levels are displayed, just below your open positions.

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