Trade Forex Trading

XAUUSD Leverage and Margin Trade Explanation and Examples

Definition of Trade Terms:

Margin required: This is the amount of money your broker requires from you to open a position. It's denoted in percentages. Equity: This is the total sum of capital you've got on your XAUUSD account.

Used margin: The amount of money on your trading account that has already been used up when buying a Gold contract, this Gold contract is the trade position that's shown and displayed in the open trade positions. As a trader you can't use this amount of money after opening a trade with it because you have already used it & it isn't available to you - until when you close your open position.

In other words, because your broker has opened up a trade position for you using the capital which you've borrowed, you must sustain this used margin for trading as a collateral to allow you as the trader to continue using the leverage that the broker has assigned you.

Free margin: The amount of money on your account which you can use to open new trade positions. This is the amount of money on your account that has not yet been leveraged because you haven't yet opened a transaction with this money - this margin is also very important for you as a trader or investor because it facilitates you to continue holding your open trade positions as will be explained below.

However, if you over use leverage, this free margin will drop below a certain percent at which your broker will have toclose out all your trade transactions mechanically, leaving you with a large loss. The broker at this point closes all your trade positions because if your trade positions are left open the broker would lose the money you've borrowed from them.

This is why you should always ensure you've got a lot of free margin. To do this never trade more than 5 percent of your trading account balance, in fact two % is recommended.

Difference between Leverage Set by the Broker & Used Leverage

If the set leverage option is 100:1, it means you can borrow upto $100 for every one dollar you have but you do not have to borrow all the $100 for every $1 you've you can decide to borrow 50:1 or 20:1. In this case even though the leverage option set 100:1 your used trading leverage will be the 50:1 or 20:1 that you've borrowed to make a trade.

Example:

You have $1,200 (Equity)

Leverage set 100:1

Leverage Used = Amount used /Equity

1 Contract - $120,000

If you buy one standard lot which is equivalent to 120,000 dollars you will have used

= 120,000/1200

= 100:1

If you buy one 0.5 lots which is equal to $60,000 you'll have used

= 60,000/1200

= 50:1

If you buy one 0.2 lots which is equal to $24,000 dollars you will have used

= 24,000/1200

= 20:1

If you buy one 0.1 lots which is equal to $12,000 dollars you'll have used

= 12,000/1200

= 10:1

In these three cases you can see that even though the set leverage is 100:1 - The used is 100:1, 50:1, 20:1 and 10:1 depending on the size of lots traded and transacted.

So Why not just Choose 10:1 ratio as the Max Leverage Option? Because to keep within the proper risk management rules it is even recommended and advised that traders use lesser than this?

This question might seem straight forward but it's not, because when you trade you use borrowed money referred to as Leverage. When you borrow capital from anybody or a bank you must sustain a security/collateral to obtain a loan, even if the collateral is depending and based on a monthly deductions from your salary, the same thing with Gold Trading and Online Trade.

In online trading the security is referred to as margin- your deposit. This is the capital you deposit with your online broker.

This is calculated in real-time as you trade. To keep your borrowed money you must maintain what is known and referred to as required capital (your deposit). Now if Your Leverage is 100:1

When trading - if you as a trader have $1,200 & use option 100:1 and buy one standard lot for $120,000 your margin on this trade transaction is the $1200 dollars in your account, this is the money that you will lose if your open transaction goes against you - the other $118,800 that's borrowed from your broker, they will close-out the open positions mechanically once your $1,200 has been taken by the market.

But this is if your broker has set 0% Margin Call Requirement before closing out your trade positions automatically.

For 20% Margin Call requirement before closing out your trades mechanically, then your positions will be stopped out once your balance gets to $240 For 50% Margin Call requirement for this level before closing out your trades transactions mechanically/automatically, then your transactions will be closed once your balance gets to $600.

If they set 100% Margin Call requirement for this level before closing out your open trade positions mechanically/automatically, then your position will be stopped out once your balance gets to $1,200: Meaning the Gold trade will close-out as soon as you execute it because even if you pay 10 pip spread your account balance will get to $1,190 and the needed % is 100% i.e. $1,200, therefore your open positions will immediately get stopped out by margin call.

Most brokers do not set 100% Margin Call requirement, but there are those that set 100% Margin Call level and these are not suitable for you at all, choose those set 50% or 20% margin requirements, in fact, those who set at 20% are the best because the likely hood them stopping outstopping outliquidating your position is reduced and minimized just as is shown on the illustrations above.

To know about the margin level that you will have used - these are calculated by your trading platform software automatically/mechanically - The MT4 Platform Software will display this as "Margin Requirement", this will be displayed as a % the higher the % the less likely your trade positions are to get closed.

For Example if

Using leverage 100:1

If leverage is 100:1 & you transact 1 Mini Lot, equal to $12,000

$12,000 dollars (mini lot) divided by 100:1 - your used capital is $120

Calculation:

= Capital Used * Percentage (100)

= $1,200/$120 * % (100)

Margin Requirement = 1000%

Investor and Trader has 980 % above the required amount (because margin call level is 20 %)

Using 10:1

If leverage is 10:1 & you transact 1 Mini Lot, equivalent to $12,000

$12,000 (mini lot) divided by 10:1 - your used capital is $1200

Calculation:

= Capital Used * Percentage (100)

= $1,200/$1200 * % (100)

Margin Requirement = 100%

Investor and Trader has 80 % above the required amount (because margin call level is 20%)

Because when a gold trader has uses higher leverage - it means they have more % above what is required (A.K.A. More "Free Margin") their open positions are less likely to get stopped out by a margin call as described above. This is the explanation why investors will select the choice/option 100:1 for their account but in accordance to their risk management rules, they won't trade above 5:1.

These Margin levels explained above are displayed on the MT4 platform software and traders can find them like as shown below while trading Gold with the MT4 software.

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