XAUUSD Contracts, Leverage & Margin, Spread, Bid and Ask Price

Lots & Contracts

XAUUSD Metal is transacted using standard contracts/lots also referred to as lots. One standard contract or standard lot of XAUUSD is made of a hundred ounces of Gold - 100 units of XAUUSD.

The Gold contract is the size of the amount of XAUUSD Ounces which are to be bought or sold in the online Gold trading market by a XAUUSD Trader.The standard XAUUSD lot which is equivalent to 1 hundred0 ounces multiplied by the prevailing price of gold isn't traded and transacted physically, but these one a hundred ounces are represented by a contract.

These 2 terms, one standard lot and one standard contract can be used inter-changeably because both of these refer to one and the same thing.

Why Trade Units of XAUUSD of 100 Ounces

The reason/explanation why such big lots are used to trade Gold or Gold metal is so that to increase the value of 1 pip (profit).

The Gold price moves are measured in points also known as pips.

1 point of an ounce of gold represents 1 Cents only, therefore the price moves are calculated using very small price moves XAUUSD, XAUUSD Metal will be quoted as 1247.01

The last digit is the pip - the second decimal point.

Now, to answer why XAUUSD is transacted in lots of a hundred ounces, we shall use the exemplification set-out below to explain:

The Gold metal will move only an average of about $5 per day, this is equal to 500 points or 500 pips, if one point is equivalent to 1 cents, then trading a single ounce of gold will only give profit of 500 points multiplied by 1 cent which is equivalent to only $5 profit.XAUUSD Trade Example with 1 Contract:

In online Gold Trading, a trader will not trade a single ounce of XAUUSD - Gold is transacted in lots of 100 ounces thence in online trading a xauusd trader would be trading 1 contract which's 100 times more the value of the ounce of XAUUSD that has been used on the exemplification laid-out above. Hence, in the above example using on contract of xauusd to trade if gold moves $5 or 500 pips instead of a xauusd trader making only $5 dollars profit, the trader will multiply their profit by 100 because they will now be trading a contract worth 100 ounces of XAUUSD, meaning the total profit would now get multiplied 100 times, and instead of making $5 a xauusd trader would now make $500 profit from this trade.

This is the reason why XAUUSD is transacted in contracts of a hundred ounces - so that to increase the profit per point.

Gold Contract

100 ounces of XAUUSD - where each ounce is equal to $1247.00 in accordance to the current Gold chart price at the time of writing, means 1 contract of XAUUSD is equivalent to 100*1247 = $124,700 dollars.

This means to buy 1 lot of XAUUSD at the present price a gold trader needs to have $124,700 in their account. But how does a retail trader who does not have a lot of capital to invest get such an amount of money?

But How Can any Trader afford $124,700 dollars to Invest With?

That is a very good question; the answer is LEVERAGE and MARGIN

In Online XAUUSD trading, you don't need $124,700 Dollars to trade XAUUSD, with leverage and margin you only need $1,300 to trade a contract of XAUUSD, but how?

We shall explain using the illustration shown below:

Leverage & Margin

In Gold Trading a small deposit can control a much larger transaction and this is what is known as leveraging, an option which gives Gold traders the ability to make nice profits & at the same time keep their trading risks to a minimum because they'll only be using little of their money, A gold trader will trade XAUUSD contracts/lots on borrowed capital, therefore a trader having a deposit of $1,300 only can borrow the rest using leverage ration like the 100:1 leverage ratio - which means that the trader can borrow $100 dollars for every $1 dollar in their trading account, to put it in simpler terms, the trader can borrow 100 times what they've deposited.

Therefore a trader who only has $1,300 in their account can borrow up to 100 times their capital, therefore after borrowing, which is after using leverage the trader will now have $1,300 multiplied by 100 which is equal to $130,000 dollars. Now with the trader controlling $130,000 dollars they can then be able to trade the 1 lot of XAUUSD.

Leverage is represented in the form of a ratio, e.g. 100:1 means that an online XAU USD online trading broker will give a xauusd trader $100 dollars for every $1 that the trader has - that's the broker will give the trader an option/choice to borrow 100 times more the amount which they deposit. Leverage option of 200:1 also means that the broker will offer the trader an option/choice to borrow 200 times the amount that they deposit in their account.

Margin - Margin is the sum of money required by your Gold broker to allow you as a trader to continue to trade with the leveraged amount. Margin is also the amount that you deposit when opening your account. For exemplification when you deposit $2,000 then your margin is $2,000 dollars.

With leverage it is possible for retail XAU USD traders or retail Gold traders to trade the online XAUUSD market. Leverage option of 100:1 means that for every $1 dollar on your account you as a trader can borrow $100 dollars, this borrowed $100 dollars will be given to you by your online Gold trading broker.What this also means is that the broker also requires you to maintain $1 dollar on your account for every $100 dollars that they've provided you with.

XAUUSD Contract Trade ExampleIf you deposit $1,300 in you trading account and your XAUUSD broker gives and provides you leverage of 100:1 then it means that now you have $1,300*100 = $130,000 that you as a trader can trade with and even buy up to 1 Gold contract.

Because the total amount that you now control is $130,000 and your money is $1,300 dollars which is equivalent to 1 % of the total, it means your account margin requirement is 1 %.

A Gold broker can tell you that their margin requirement is 1% which means that their leverage ratio is 100:1, if your broker tells you their margin requirement is 2% it means that their leverage is 50:1 (calculation $1 dollar for every $50 dollars is equivalent to 2%)

Therefore, with leverage and margin as explained above it means that retail XAU USD traders are not required to deposit all the cash for the whole contract and lot that they are going to be trading with. The account they open they can trade on leverage and this trading account is known as a margin account - meaning they are trading on margin - the money in their account is the margin for the leverage they'll be using for trading.

SpreadsThe spread is the difference between the price at which you buy & the price at which the broker is offering to sell.

Spread can also be defined as the difference between the Bid Price and the Ask Price, the Bid Ask price shown below can be used in calculating the spreads for trading Gold, Gold metal.

Gold Contracts, Leverage and Margin in XAUUSD Trading, Gold Trading Spread, How to Read Gold Trading Bid and Ask Price

Gold Spreads on MT4 Software Platform

Example illustration of How to Calculate Gold Spreads

The Bid ASK Price of Gold is 1247.11/1247.63

The spread is 1247.63 - 1247.11 = 0.52

Spread is 52 pips

This spread is the profit that the XAUUSD broker makes.

Bid/Ask Price

Bid is the price at which you sell

Ask is the price at which you buy

If the quote for EUR USD is 1247.11/1247.63Bid/Ask= 1247.11/1247.63

Hence:Bid Price =1247.11Ask Price =1247.63

Mini Lots & Micro Lots

As a note, there's also the fraction of 1 Lot in XAUUSD trading, these fractions of the standard lot are provided by Gold brokers so that to make XAUUSD more affordable to traders with the minimum capital which is required being as little as $100 dollars.

The Fraction of a standard Gold contract are called Mini Lot which's 1/10 of a standard XAUUSD contract & Micro Lot which is 1/100 of a Standard XAUUSD contract.

Mini Lot = 10 Ounces of GoldMicro Lot = 1 Ounce of Gold

These mini Gold trading lots were introduced to make the online spot Gold trading market more accessible to the retail XAUUSD investor and also attract more and more retail Gold investors. Maybe this is why online XAU USD trading has become very popular, even with as little as $100 anybody can enter this market.

More Tutorials and Guides and Lessons:

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