Trade Forex Trading

XAUUSD Leverage and Margin Trade Explanation and Examples

Definition of Trade Terms:

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

Margin Utilized: This refers to the capital within your trading account that has been allocated to secure a Gold contract purchase. This specific Gold contract represents the active trade position visible in your open trades. As a trader, once this capital is committed to an open position, it is no longer available for other uses until that specific commitment is closed out.

In simpler terms, since your broker has started a trade for you using money you have borrowed, you need to keep this borrowed money available for trading as security. This lets you, as the trader, keep using the extra trading power the broker gave you.

Free Margin: This represents the available funds within your account that you can deploy to initiate new trade positions. This capital has not yet been leveraged because you have not executed any trades using it. This margin amount is highly significant for you, whether as a trader or investor, because it safeguards your capacity to maintain your currently open trade positions, as will be demonstrated below.

But, using too much leverage will cause this free money to fall below a set level, and your broker will automatically close all your trades, leading to a very big loss. At that point, the broker closes all your trades because if they stay open, the broker would lose the money they lent you.

That is why you need to be sure you always have lots of free money in your account. To make sure of this, never risk more than 5 percent of your account: two percent is even better.

Difference between Leverage Set by the Broker & Used Leverage

If the leverage option is set at 100:1, you're able to borrow as much as $100 for every dollar you have, but you don't need to borrow the full $100 for each $1: you could choose to borrow at 50:1 or 20:1. So, even if the leverage is set at 100:1, the actual leverage you use will be either the 50:1 or 20:1 that you decided to borrow for a trade.

Example:

You have $1,200 (Equity)

Leverage set 100:1

Leverage Used = Amount utilized / Equity

1 Contract - $120,000

Should you initiate a purchase of one standard lot, representing a value of $120,000.

= 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

Should you purchase 0.2 contract units/lots, equating to $24,000 USD, this is the capital utilized:

= 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 cases, leverage starts at 100:1. But it drops to 50:1, 20:1, or 10:1 based on lot size.

Why not simply choose a 10:1 leverage ratio as your maximum option? To adhere to sound risk management practices, it is generally recommended that traders opt for a lower ratio.

This question may 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 the context of online trading, the safeguarding capital is known as margin - this is the initial capital sum deposited with your chosen online broker.

This is calculated in real-time during your trades. To retain your borrowed funds, you must maintain what is referred to as the required capital (your deposit). If your leverage is 100:1.

Imagine you possess $1,200 in your trading account and utilize 100:1 leverage to acquire one standard lot valued at $120,000. Your $1,200 serves as the margin for this trade - it's the capital you stand to forfeit if the trade moves adversely. The remaining $118,800 is advanced by your broker. Should your $1,200 margin be fully depleted, the broker will automatically close your position.

This situation only applies if your broker sets the Margin Call Requirement at 0% before automatically closing your positions.

If there is a 20% margin call before trades are automatically closed, positions will stop at $240. If it is 50%, positions will stop being taken at $600.

If a 100% Margin Call threshold is triggered at this stage, preceding the automatic cancellation of your active positions, your holdings will be liquidated once your account balance dips to $1,200. This implies the Gold trade will be halted instantaneously upon execution because covering just a 10 pip spread would reduce your balance to $1,190, meeting the requisite 100% parameter. At $1,200, your open positions will be immediately stopped out due to the margin call.

Most brokers avoid using a 100% margin call level. Instead, seek brokers offering lower margin requirements of 50% or even 20%, as these minimize the likelihood of your position being stopped out.

To find out the margin percentage being used - a figure automatically calculated by your trading platform - the MT4 Platform designates this as the "Margin Requirement. " This percentage is displayed accordingly: a higher figure suggests a lesser likelihood of your current trade positions being forcibly 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:

Equals Capital Invested multiplied by Percentage (100).

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

Margin Requirement = 1000%

The investor/trader exhibits a margin level 980% above the required buffer (since the margin call threshold is set at 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:

Equals Capital Invested multiplied by Percentage (100).

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

Margin Requirement = 100%

Trader Holds Over 80% Funds Past Margin Call at 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 software and traders can find them like as shown below while trading Gold with the MT4 software.

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