Explain What is Leverage? Explain What is Gold Margin?
The meaning of Leverage is having the ability to control a large amount of money using very little of your own money & borrowing the rest - this is what makes the market to attract many traders.
We shall explain leverage first and then explain margin in this learning how to calculate leverage & margin tutorial.
Example:
We will use this trading example to illustrate what leverage is? If your online broker assigns you leverage of 100:1 (this is the best option to choose as the maximum leverage for any account)
This means you borrow $100 dollars for each one dollar you have in your trading account.
In other terms your broker gives you $100 dollars for each one dollar in your account. This is what's referred to as leverage.
This means that if you open a trading account with $1,000 & your leverage ratio option is 100:1, then you get $100 for every $1 you that you have in your trading account, total amount that you'll control is:
If for 1 dollar the broker gives you 100
Then if you have 1,000 you will get a total of:
$1,000 * 100 = $100,000
Now you control $100,000 of Investment
Most new traders ask what leverage is best leverage for $1,000, or $2,000, or $5,000 dollars account? - Best leverage option to select when opening a live account is always 100:1 & not 400:1.
What's Gold Margin?
Gold Margin is the amount of money required by your broker so as to allow you to continue to trade with borrowed amount.
In other words the question what's margin in XAUUSD? can be explained as the money required to cover open trade transactions and is expressed in percent. For 100:1, the amount you'll control is $100,000 dollars as explained in the above example.
Now can you compare a investor investing $1,000 with another one that's investing $100,000? Obviously Not. This is how it works: it takes you from that retail investor investing $1,000 to that investing $100,000. Where does this extra funds originate from? - You as a trader borrow it from your online broker in what's simply referred to as Leverage. This funds which you borrow, you as a trader borrow it against the $1,000 of your equity that you as a trader deposit with your broker. If you were to explain what this leverage means - then it is the ability to control a large amount of money using very little of your own money and borrowing the rest. Otherwise, if you were trade without this leverage it would not be as profitable as it is, in fact you can still choose not to use leverage, using the 1:1 leverage option but you would not make money and it would take too long to make any profit.
Example of how to calculate leverage & margin:
XAUUSD Margin required in this case is $1,000 dollars (your money) if it's expressed as a percentage of $100,000 dollars in your account which you control it is:
If leverage = 100:1
1,000 / 100,000 * 100= 1 %
Margin required = 1 %
(1/100 *100= 1%)
'Trade Forex Trading - Please simplify because I am Beginner'
(Simplify - your equity is $1,000 after leverage you control $100,000 - $1,000 is what percent of $100,000 - it is 1 %) that is your margin requirement for your account.
The margin example illustrated below, the set leverage ratio option is 100:1, margin which is 1% is $2683.07, therefore the total sum controlled by trader is: $268,307 - this is because with this leverage the trader has used little of his money and borrowed the rest of the amount, with this set at 100:1 ratio, the trader is using 1 % of their capital, this 1% equals to $2683.07, if 1% is equivalent to $2683.07 then 100% is equivalent to $268,307
MT4 Transactions Window Panel - Leverage and Margin Explained
- If = 50:1 Leverage
Then margin requirement = 1/50 *100= 2%
If you have $1,000,
1,000* 50 = $50,000.
1,000 / 50,000 * 100= 2 percent
(Simplify - your equity is $1,000 after leverage you control $50,000 - $1,000 is what percent of $50,000 - it is 2 %) that's your margin requirement
- If = 20:1 Leverage
Then margin requirement = 1/20 *100= 5%
If you have $1,000,
1,000* 20 = $20,000.
1,000 / 20,000 * 100= 5 %
(Simplify - your equity is $1,000 after leverage you control $20,000 - $1,000 is what percentage of $20,000 - it is 5%) that is your margin requirement
- If = 10:1 Leverage
Then the requirement is = 1/10 *100= 10%
If you have $1,000,
1,000* 10 = $10,000.
1,000 / 10,000 * 100= 10 %
(Simplify - your equity is $1,000 after leverage you control $10,000 - $1,000 is what percent of $10,000 - it's 10%) that is your margin requirement
What is Difference Between Maximum Leverage and the Leverage Used?
However, you shouldn't that there's a difference between maximum leverage ( xauusd leverage given by your trading broker which is the highest leverage you can trade with if you choose to) & used leverage ( xauusd leverage based on the lots you have opened/open trades). One is the broker's (Maximum Leverage) and the other is trader's (Used Leverage). To explain this leverage concept we will use the example above:
If your broker has given you 100:1 Max Leverage, but you only open a trade transaction of $10,000 dollars then Used Leverage is:
$10,000: $1,000 dollars (your money)
10:1
You've used 10:1 Leverage, but your max is still 100:1 Leverage. This means that even if you're given 100:1 Maximum Leverage or 400:1 Max Leverage, you do not have to use all of it. It is best to keep your used leverage to a maximum of 10:1 but you'll still select 100:1 maximum leverage ratio for your account. The extra leverage will give you as a trader what we call Free Margin, As long as you have Free margin on your account then your trade transactions will not get closed by your trading broker because this margin requirement will remain above required level.
When it comes to gold trading one of your rules: equity management guidelines on your trading plan should be to use leverage below 5:1.
In the above image examples, the trader is using $2683.07, total controlled sum is $268,307, but trading account equity is $16,116.55, therefore used trading leverage is ($268,307 divide by 16,116.55) = 16.64 : 1
16.64 : 1 Used Leverage
XAUUSD Margin accounts allows traders to control a large amount of xauusd units using little of their own while borrowing the rest
Obtaining this account will enable you to borrow money from the broker to trade gold lots with.
The amount of borrowing power your trading account gives you what is called ' xauusd leverage", ++1& is usually expressed as a ratio - a ratio of 100:1 leverage means you can control resources worth 100 times your deposit amount.
What this means in Gold terms is that with 1% margin in your trading account you as a trader can control a trade worth $100,000 with $1,000 deposit.
However, Trading this account increases both potential for profits as well as losses. In ##3you as a trader can never lose more than you invest, losses are limited to your deposits ##3and usually brokers will close a ##1++tradetrade--transaction which extends beyond your deposit amount by executing a margin call. Traders must hence try & keep their margin requirement level which is above that which is required. By using equity management guidelines & keeping your used leverage below 5:1.
