XAUUSD Contracts, Leverage & Margin, Spread, Bid and Ask Price

Lots and Contracts

XAUUSD Metal is traded using standard contracts also referred to as lots. One standard contract or standard lot of Gold is made of a hundred ounces of XAUUSD - 100 units of XAUUSD.

The Gold contract is the size of the amount of XAUUSD Ounces which are to be bought or sold in the online Gold trading market by a XAUUSD Trader.The standard Gold lot which is equal to 1 hundred0 ounces multiplied by the ruling market price of xauusd is not traded physically, but these one 100 ounces are represented by a contract.

These 2 terms, 1 standard lot & 1 standard contract can be used inter-changeably because both of these refer to one & the same thing.

Why Trade Units of Gold of 100 Ounces

The reason why such large lots are used to trade Gold or Gold metal is so as to increase the value of 1 pip (profit).

The XAUUSD price moves are measured in points also referred to as pips.

1 point of an ounce of xauusd represents 1 Cents only, henceforth the price moves are calculated using very small price moves XAUUSD, Gold Metal will be quoted as 1247.01

The last digit is the pip - the second decimal point.

Now, to answer why XAUUSD is traded in lots of a hundred ounces, we shall use the example below to explain:

The XAU/USD metal will only move an average of about $5 dollars per day, this is equivalent to 500 points or 500 pips, if one point is equal to 1 cents, then trading a single ounce of xauusd will only give a profit of 500 points/pips multiplied by 1 cent which is equal to only $5 dollars profit.Gold Trade Example with 1 Contract:

In online XAUUSD Trading, a trader will not trade a single ounce of Gold - XAUUSD is traded in contracts/lots of 1 hundred0 ounces henceforth in trading a gold trader would be trading 1 contract which is 100 times more the value of the ounce of Gold that has been used in the illustration laid-out above. Therefore, in the above example using on contract of gold to trade if xauusd moves $5 dollars or 500 pips instead of a gold trader making only $5 dollars profit, the Gold trader will multiply their profit by 100 because they will now be trading a contract worth 100 ounces of XAUUSD, meaning the overall total trading profit would now get multiplied 100 times, & instead of making $5 a gold trader would now make $500 dollars profit from this transaction.

This is the reason why Gold is transacted in contracts of a hundred ounces - so that to increase the profit per point.

XAUUSD Contract

100 ounces of XAUUSD - where each ounce is equivalent to $1247.00 according to the current Gold chart price at the time of writing, means 1 contract of Gold is equal to 100*1247 = $124,700 dollars.

This means to buy 1 contract of Gold at the current price a gold trader needs to have $124,700 dollars in their account. But how does a retail trader who doesn't have a lot of money to invest get such an amount of money?

But How Can any Trader afford $124,700 dollars to Invest With?

That is a very good question; the answer is LEVERAGE & MARGIN

In Online XAUUSD trading, you don't need $124,700 Dollars to trade XAUUSD, with leverage & margin you only need $1,300 to transact a contract of XAUUSD, but how?

We shall explain using the example illustration shown below:

Leverage & Margin

In Gold Trading a small deposit can control a much larger transaction and this is what is referred to as leveraging, an option which gives XAUUSD traders the ability to make nice profits and at the same time keep their trading risks to a minimum because they will only be using little of their money, A gold trader will trade Gold contracts/lots on borrowed capital, henceforth a trader having a deposit of $1,300 dollars can only borrow the rest oof--thee--amoount using a leverage ratio option like the 100:1 leverage option - which means that the gold trader can borrow $100 for every $1 dollar in their account, to put it in simpler terms, the trader can borrow 100 times what they've deposited.

Therefore a trader who only has $1,300 in their account can borrow upto 100 times their trading capital, therefore after borrowing, which is after using leverage the trader will now have $1,300 multiplied by 100 which is equivalent to $130,000 dollars. Now with the trader controlling $130,000 dollars they then can be able to trade the 1 contract of XAUUSD.

Leverage is represented in the form of a ratio, for example 100:1 means that an online XAUUSD trading broker will give a gold trader $100 for every $1 that the online trader has - that's the broker will give the Gold trader an choice/option to borrow upto 100 times more the amount that they deposit. Leverage option of 200:1 also means the broker will give the gold trader an choice/option to borrow upto 200 times the amount that they deposit in their account.

Margin - Margin is the amount of money required by your Gold broker to allow you the trader to continue trading with the leveraged amount. Margin is also the amount that you deposit when opening your account. For exemplification when you deposit $2,000 dollars then your margin is $2,000.

With leverage it is possible for retail Gold traders or retail XAUUSD investors to trade the online Gold market. Leverage option of 100:1 means that for every $1 dollar on your trading account you can borrow $100 dollars, this borrowed $100 will be given to you by your online XAUUSD trading broker.What this also means is that the broker also requires you to maintain $1 dollar in your account for every $100 dollars that they have provided you with.

Gold Contract Trade ExampleIf you deposit $1,300 in you trading account and your Gold broker gives you leverage option of 100:1 then it means that now you have $1,300*100 = $130,000 dollars that you as a trader can transact with & even buy upto 1 Gold contract.

Because the total amount that you now control is $130,000 and your money is $1,300 dollars which's equal to 1 % of the total, it means your account margin requirement is 1%.

A Gold broker can tell you that their margin requirement is 1% which means that their leverage option is 100:1, if your broker tells you their margin requirement is 2 % it means that their leverage is 50:1 (calculation $1 dollar for every $50 is equal to 2%)

Hence, with leverage and margin as described above it means that retail XAU USD traders are not required to deposit all the cash for the whole contract that they are going to be trading with. The account they open they can trade on leverage and this account is referred to as a margin account - meaning they are trading on margin - the money in their account is the margin for the leverage they will be using for trading.

SpreadsThe spread is the difference between the price at which you buy & the price at which the broker is offering to sell.

Spread can also be defined as the difference between the Bid Price and the Ask Price, the Bid Ask price illustrated below can be used to calculate the spreads for trading XAUUSD, XAUUSD metal.

XAU/USD Contracts, Leverage & Margin, Spread, Bid and Ask Price

Gold Trading Spreads on MT4 Platform

Example illustration of How To Calculate Gold Spreads

The Bid ASK Price of XAUUSD is 1247.11/1247.63

The spread is equal to 1247.63 - 1247.11 = 0.52

Spread is 52 pips

This spread is the profit that the Gold broker makes.

Bid/Ask Price

Bid is the price at which you sell

Ask is the price at which you buy

If the quote for EURUSD is 1247.11/1247.63Bid/Ask= 1247.11/1247.63

Hence:Bid Price =1247.11Ask Price =1247.63

Mini Lots and Micro Lots

As a note, there's also the fraction of 1 Lot in Gold trading, these fractions of the standard lot are provided by XAUUSD brokers so that to make Gold more affordable to traders with the minimum capital required being as little as $100 dollars.

The Fraction of a standard Gold contract are called Mini Lot which is 1/10 of a standard XAUUSD contract and Micro Lot which is 1/100 of a Standard Gold contract.

Mini Lot = 10 Ounces of GoldMicro Lot = 1 Ounce of Gold

These mini XAUUSD trading lots were introduced to make the online spot Gold trading market more accessible to the retail Gold investor and also attract more and more retail Gold investors. Maybe this is why online XAU/USD has become very popular, even with as little as $100 anybody can enter this market.

Learn More Lessons & Topics:

Trade Forex Trading