Gold Leverage & Margin Trading Explanation & Examples
Margin required : It's the amount of money your broker requires from you to open a position. It's expressed in percentages.
Equity : It is the total sum of trading capital you have in your account.
Used margin : amount of money in your account which has been already used when buying a contract, this contract is one that's displayed in the open trade positions. You can't use this sum of money after opening a transaction order transaction because you have already used it and it isn't available to you.
In other terms, because your online broker has opened up a trade for you using the trading capital you've borrowed, you must sustain this usable margin for your account as a security to allow you to continue using this leverage he has given you.
Free margin : amount in your trading account which you can use to execute new trades. This is the amount of money in your account that has not yet been leveraged because you have not yet opened a transaction with this money - this money also is very important for you as a trader because it enables you to continue holding your open positions as will be explained below.
However, if you over use leverage, this free margin will go below a certain percentage at which your online broker will have to close out all your trade transactions automatically, leaving you with a large loss. The broker at this point will automatically close-out all your open trade transactions because if your open trades are left open then your online broker would lose money that you would have borrowed from them.
This is why you should always make sure you have a lot of free margin. To do this never trade more than 5 % of your account, in fact two percent% is recommended.
Difference Between Leverage Set by the Broker & Used Leverage
If the set leverage option is 100:1, what this means is that you can borrow up to $100 for every one dollar you that have in your account, but you do not have to borrow all the $100 dollars for each one dollar you have, you can decide you as a gold trader want to borrow 50:1 or 20:1. In this instance though leverage option is pre set at 100:1 your used trading leverage will be 50:1 or 20:1 which you have borrowed to make a trade position.
Example:
You have $1000 dollars (Equity)
Set 100:1
Leverage Used = Amount used /Equity
If you buy xauusd lots equal to $100,000 you'll have used
= 100,000/1000
= 100:1
If you buy gold trading lots equal to 50,000 dollars that as a trader you'll have used
= 50,000/1000
= 50:1
If you buy gold trading lots equal to 20,000 dollars that as a trader you will have used
= 20,000/1000
= 20:1
In these three cases you can see that although the set is 100:1
The used leverage is 100:1, 50:1, 20:1 depending on the size of lots traded.
So Why not Just Choose 10:1 option as the Maximum Leverage? Because to keep within proper risk management rules it's even advised that traders use less than this?
This question may seem straight forward but it's not, because when you trade you as a xauusd trader use borrowed money referred to as Leverage. When you borrow capital from anyone or from a bank you must sustain a security or collateral to acquire a loan, even if the security is depending on monthly deductions from your wages, the same thing with XAUUSD.
In the collateral is known as margin. This is equity you deposit with your broker.
This is calculated in real-time as you trade. To keep your borrowed money you must maintain what's known as required capital (your deposit).
Now if Your Leverage is 100:1
When trading if you have $1,000 dollars & use trading leverage ratio 100:1 & buy 1 standard lot for $100,000 dollars your margin on this transaction is $1000 dollars in your account, this is money which you will lose if your open trade transaction moves against you the other $99,000 dollars that's borrowed, they will stop out the open trade transactions automatically once your $1,000 dollars has been taken out by the market.
But this is if your broker has set 0 percent Margin Requirements before stopping outliquidating your trade transactions automatically.
For 20% requisite before stopping out your gold positions automatically, then your trading transactions will be closed once your account balance gets to $200
For 50 % requisite of this level before stopping out your gold positions automatically, then your trades will be closed once your account balance gets to $500
If they set 100% requirement of this level before closing your open trades automatically, then your trade position will be stopped out once your balance gets to $1,000: Meaning the trade will close-out as soon as you execute it because even if you pay 1 pip spread your trading account balance will drop to $990 & the needed percentage% is 100% i.e. $1,000 dollars, henceforth your orders will immediately get closed out.
Most brokers don't set 100 % requirement, but there are those who set 100% are not suitable for you at all, choose those set 50% or 20 percent% margin requirements, in fact, those brokers which set their margin requirement at 20% are some of the best since due to the likely hood they close out your trade position is reduced as shown in example above.
To know about this level which's calculated by your platform automatically - the MetaTrader 4 Software will show this as "XAUUSD Margin Requirements", This will be displayed as a percentage% the higher the percentage% the less ikely your trade transactions are to get closed out.
For Example if
Using 100:1
If leverage is 100:1 & you transact lots equal to $10,000
$10,000 dollars divide by 100:1, used capital is $100
Calculation:
= Capital Used * %(100)
= $1,000/$100 * %(100)
XAUUSD Margin Requirements = 1000%
Investor has 980 percent% above requirement amount
Using 10:1
If leverage is 10:1 & you transact lots equal to $10,000
$10,000 dollars divide by 10:1, used capital is $1000 dollars
Calculation:
= Capital Used * %(100)
= $1,000/$1000 * %(100)
XAUUSD Margin Requirement = 100 percentage
Investor has 80% above the required sum
Because when a gold trader has a higher leverage means that they have more percentage% above what is required(A.K.A. More "Free Margin") their open transactions are less likely to get liquidated. This is reason why traders will choose option 100:1 for their trading account but according to their risk management principles, these traders will not trade above 5:1.
These Levels are Displayed on Platform Image Below as an Example:
Meta Trader 4 Software
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