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 on 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 position 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 collateral to allow you to continue using this leverage he has assigned you.
Free margin : amount in your trading account which you as a trader can use to execute new trades. This is the amount of money on 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/facilitates 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 closeout all your trades mechanically, leaving you with a large loss. The broker at this point will automatically close-out all your open trades 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 ensure you have got 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 don't have to borrow all the $100 dollars for each one dollar you have, you as a trader 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 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'll 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 position size of lots traded and transacted.
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 than this?
This question may seem straight forward but it's not, because when you trade you as a gold trader use borrowed money referred to as Leverage. When you borrow capital from anyone or from a bank you as a trader must sustain a security/collateral to acquire a loan, even if the security is depending and based on monthly deductions from your own 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 as a trader 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 & open a trade of 1 standard contract/lot worth $100,000, then your margin on this trade transaction is $1000 dollars in your account, this is money which you will lose out if your open trade transaction moves against you : the other $99,000 dollars that is 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 closing out your trades automatically.
For 20% requisite before stopping out your gold positions mechanically/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 mechanically/automatically, then your trade position will be stopped out once your balance gets to $1,000: Meaning the trade will closeout as soon as you execute it because even if you pay 1 pip spread your trading account balance will drop to $990 and the needed percentage is 100% i.e. $1,000 dollars, henceforth your open positions will immediately get closed out.
Most brokers do not 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 that set their trading margin requirement at 20% are some of the best since due to and because of the likely hood they close out your trade is reduced just as is displayed and illustrated in example above.
To know about this level which's calculated by your platform automatically - the MT4 Platform Software will show this as "XAUUSD Margin Requirements", This will be displayed as a percentage the higher the percentage the less ikely your trades are to get closed.
For Example if
Using 100:1
If leverage is 100:1 & you transact lots equal to $10,000
$10,000 dollars divided 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 % above what is required(A.K.A. More "Free Margin") their open transactions are less likely to get closed out. 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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