Gold Leverage & Margin Trading Explanation & Examples
Margin required : It is the amount of money your xauusd broker requires from you to open a position. It is 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 already been used up when buying a xauusd contract, this contract is one that's displayed in the open trade positions. As a trader you can't use this amount of money after opening a trade order transaction because you have already used it & it isn't available to you.
In other terms, because your xauusd broker has opened up a trade transaction for you using the trading capital you have borrowed, you must sustain this usable trading margin for your account as a security to allow you to continue using this xauusd leverage he has given you.
Free margin : amount in your account that you can use to execute new positions. This is the amount of money in your account that has not yet been xauusd leveraged because you've 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 xauusd leverage, this free trading margin will go below a certain percent at which your xauusd broker will have to close out all your positions automatically, leaving you with a large loss. The xauusd broker at this point will automatically close-out all your open trade transactions because if your open trades are left open then your broker would lose money that you would have borrowed from them.
This is why you should always make sure you've a lot of free margin. To do this never trade more than 5 percentage of your gold account, in fact 2 % is recommended.
Difference Between XAUUSD Leverage Set by the Broker & Used XAUUSD Leverage
If the set xauusd trading leverage ratio is 100:1, what this means is thatthat-as-a-trader you can borrow up to 100 dollars for every one dollar you that have in your account, but you don't have to borrow all the 100 dollars for every 1 dollar you have, you can decide you want to borrow 50:1 or 20:1. In this case though the leverage option is preset at 100:1 your used gold trading leverage will be 50:1 or 20:1 that you have borrowed to make a trade transaction.
Example:
You have 1000 dollars (Equity)
Set 100:1
XAUUSD Leverage Used = Amount used /Equity
If you buy xauusd lots equal to 100,000 dollars 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 3 cases you can see that allthough the set is 100:1
The used is 100:1, 50:1, 20:1 depending on the size of xauusd lots traded.
So Why not Just Select 10:1 option as the Maximum XAUUSD Leverage? Because to keep within proper risk management rules it is even adviced that traders use less than this?
This question may seem straight forward but it's not, because when you trade you use borrowed money known A.K.A. XAUUSD 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 collateral is based on monthly deductions from your own salary, the same thing with XAUUSD.
In xauusd the security is known as margin. This is capital you deposit with your broker.
This is calculated in realtime as you trade. To keep your borrowed money you must maintain what is known as required capital (your deposit).
Now if Your Gold Leverage is 100:1
When trading if you have $1,000 & use trading leverage ratio 100:1 & buy 1 standard lot for $100,000 your margin on this transaction is $1000 dollars in your account, this is money which you will lose if your open trade transaction goes against you the other $99,000 that is borrowed, they will stop out the open xauusd trade transactions automatically once your $1,000 has been taken by the gold market.
But this is if your xauusd broker has set 0% XAUUSD Margin Requirement before closing out your gold trades automatically.
For 20% requisite before stopping out your gold positions automatically, then your trade 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 out your open trade positions 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 and the needed percentage is 100% i.e. 1,000 dollars, therefore your orders will immediately get closed out-out.
Most brokers don't set 100% requirement, but there are those who set 100% aren't suitable for you at all, select those set 50% or 20% margin requirements, in fact, those gold brokers which set their margin requisite at 20% are some of the best since due to the likely hood they close out-out your trade position is reduced as shown in example above.
To know about this level which is calculated by your platform automatically - the MetaTrader 4 XAUUSD Platform will display this as "XAUUSD Margin Requirement", This will be displayed as a percent the higher the percent the less likely your positions are to get closed out.
For Example if
Using 100:1
If xauusd leverage is 100:1 & you transact xauusd lots equal to $10,000
$10,000 dollars divide by 100:1, used capital is $100
Calculation:
= Capital Used * Percent(100)
= $1,000/$100 * Percent(100)
XAUUSD Margin Requirement = 1,000 %
InvestorTrader has 980 percent above requirement amount
Using 10:1
If xauusd leverage is 10:1 & you transact xauusd lots equal to $10,000
$10,000 dollars divide by 10:1, used capital is $1000
Calculation:
= Capital Used * Percent(100)
= $1,000/$1000 * Percent(100)
XAUUSD Margin Requirement = 100 %
Investor has 80% above the required sum
Because when a trader has a higher xauusd leverage means that they have more percent above what is required(A.K.A. More "Free XAUUSD Margin") their open xauusd transactions are less likely to get closed. This is reason why traders will choose option 100:1 for their account but according to their risk management rules, these investors won't trade above 5:1.
These Levels are Shown on the Software Screen-Shot Below as an Examples:
MetaTrader 4 XAUUSD Platform