Trade Gold Trading

XAUUSD Leverage and Margin Trading Explanation & Examples

Definition of Trading Terms:

Margin required: This is the amount of money your broker requires from you as a trader to open a position. It is expressed in percents. Equity: This is the total amount of capital you have in your Gold trading account.

Used margin: The amount of money in your trading account that has been already used when buying a Gold contract, this XAUUSD contract is the trade that is displayed in the open trade positions. As a trader you can't use this amount of money after opening a trade with it because you have already used it and it is not available to you - until when you close your open position.

In other words, because your online broker has opened up a position for you using the capital which you have borrowed, you must maintain this used margin for trading as a security to allow you to continue using this leverage that the online broker has given you.

Free margin: The amount of money in your account which you can use to open new trade positions. This is the amount of money in your account that has't yet been leveraged because you haven't yet opened a transaction with this money - this margin is also very important for you as a trader or investor because it enables you to continue holding your open trades as will be illustrated below.

However, if you over use leverage, this free margin will drop below a certain percent at which your online broker will have to close all your positions automatically, leaving you with a big loss. The online broker at this point closes all your position because if your positions are left open the broker would lose the money you 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 percent of your account balance, in fact 2 percent% is recommended.

Difference between Leverage Set by the Broker and Used Leverage

If the set leverage ratio is 100:1, it means you can borrow upto $100 for every one dollar you have but you do not have to borrow all the $100 for every $1 you've you can decide to borrow 50:1 or 20:1. In this case even though the leverage ratio set 100:1 your used leverage will be the 50:1 or 20:1 which you have borrowed to make a transaction.

Example:

You have 1200 dollars (Equity)

Leverage set 100:1

Leverage Used = Amount used /Equity

1 Contract - $120,000 dollars

If you buy 1standard lot which's equal to 120,000 you will have used

= 120,000/1200

= 100:1

If you buy one 0.5 lots which is equal to $60,000 you will have used

= 60,000/1200

= 50:1

If you buy one 0.2 lots which is equivalent to $24,000 dollars you'll have used

= 24,000/1200

= 20:1

If you buy one 0.1 lots which is equal to $12,000 you will have used

= 12,000/1200

= 10:1

In these three cases you can see that even though the set leverage is 100:1 - The used is 100:1, 50:1, 20:1 & 10:1 depending on the size of lots traded.

So Why not just Choose 10:1 option as the Maximum Leverage? Because to keep within the proper risk management principles it is even recommended that traders use less than this?

This question may seem straight forward but it is not, because when you trade you as a xauusd trader use borrowed money known as Leverage. When you borrow capital from anyone or a bank you must maintain a security or collateral to acquire a loan, even if the collateral is depending on a monthly deductions from your own salary, the same thing with XAUUSD Trading and Online Trading.

In online trading the security is referred to as margin- your deposit. This is the capital you deposit with your online broker.

This is calculated in real-time as you trade. To keep your borrowed money you must maintain what is known as the required capital (your deposit). Now if Your Leverage is 100:1

When trading - if you have $1,200 & use option 100:1 and buy one standard lot for $120,000 your margin on this transaction is the $1200 dollars in your account, this is the money that you'll lose if your open transaction goes against you the other $118,800 that is borrowed from your broker, they will close the open transactions automatically once your $1,200 has been taken by the market.

But this is if your broker has set 0 percent% Margin Call Requirement before closing your trade transactions automatically.

For 20% Margin Call requirement before closing your trades transactions automatically, then your trades will be closed once your balance reaches $240 dollars for 50 % Margin Call requirement of this level before closing your trades automatically, then your trades will be stopped out once your balance gets to $600.

If they set 100% Margin Call requirement of this level before closing your open positions automatically, then your trade will be stopped out once your balance gets to $1,200: Meaning the trade will close out as soon as you execute it because even if you pay 10 pip spread your account balance will get to $1,190 and the needed percentage% is 100% i.e. $1,200 dollars, therefore your orders will immediately get closed by margin call.

Most brokers don't set 100 % Margin Call requirement, but there are those that set 100% Margin Call level & these aren't suitable for you at all, select those set 50% or 20 % margin requirements, in fact, those that set at 20% are the best because the likely hood them stopping outclosing outliquidating your trade is reduced as illustrated in the examples above.

To know about the margin level that you'll have used - these are calculated by your software automatically - the MetaTrader 4 Software will display this as "Margin Requirement", this will be shown as a percent% the higher the percentage% the less likely your trades are to get closed.

For Example if

Using leverage 100:1

If leverage is 100:1 and you transact 1 Mini Lot, equal to $12,000

$12,000 (mini lot) divide by 100:1: your used capital is $120 dollars

Calculation:

= Capital Used * % (100)

= $1,200/$120 * Percentage (100)

Margin Requirement = 1000 %

Investor has 980% above the required amount (because margin call level is 20 %)

Using 10:1

If leverage is 10:1 and you transact 1 Mini Lot, equal to $12,000 dollars

$12,000 dollars (mini lot) divide by 10:1: your used capital is $1200

Calculation:

= Capital Used * Percentage (100)

= $1,200/$1200 * % (100)

Margin Requirement = 100%

Investor has 80% above the required amount (because margin call level is 20 %)

Because when a xauusd trader has a uses higher leverage - it means that they have more percent% above what is required (A.K.A. More "Free Margin") their open transactions are less likely to get closed by a margin call as explained above. This is the reason why investors will choose the option 100:1 for their account but according to their risk management principles, they will not trade above 5:1.

These Margin levels explained above are listed on the MT4 software and traders can find them as shown below while trading Gold with the MT4 platform.

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