Leverage & Margin Trading Explanation and Example

Margin required : It's the amount of money your broker requires from you to open a trade transaction. It is conveyed in percentages.

Equity : It is the total sum of trading capital you have in your account.

Used margin : amount of money in your trading account which has already been used up when buying a silver trading contract, this contract is one that is displayed in open trade positions. As a trader you can not use this amount of money after opening a trade because you've already used it & it isn't available to you.

In other words, because your broker has opened up a trade transaction for you using the capital you have borrowed, you must preserve this usable trading margin for your account as a security to allow you to continue using this leverage he has given you.

Free margin : amount in your account which you can use to open new trade positions. This is amount of money in your trading account that has not yet been trading leveraged because you've not yet opened a trade position with this money - this amount is also very important for you as as investor because it enables you as a trader to continue holding your open transactions as will be explained below.

However, if you over use leverage, this free margin will drop below a certain percentage at which your broker will have to close out all your positions automatically, leaving you with a big loss. broker at this point will automatically close-out all your open trades 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. ToIn-order-to do this as a trader never trade more than 5 % of your account, in fact 2 percent is adviced.

Difference Between Trading Leverage Set by Broker & Used Silver Leverage

If the set leverage option is 100:1, it means that you can borrow up to 100 dollars for every dollar which you have in your trading account but you do not have to borrow all the 100 dollars for every dollar you've, but you can decide to borrow 50:1 or 20:1. In this case allthough the trading leverage option set 100:1 your used leverage will be the 50:1 or 20:1 that you've borrowed to make a trade position.

Example:

You have $1000 (Equity)

Set 100:1

Leverage Used = Amount used /Equity

If you buy lots equal to $100,000 you'll have used

= 100,000/1000

= 100:1

If you buy xagusd trading lots equal to 50,000 dollars that as a trader you will have used

= 50,000/1000

= 50:1

If you buy xagusd 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 allthough the set is 100:1

The used is 100:1, 50:1, 20:1 depending on the size of silver lots traded.

So Why not Just Select 10:1 option as the Maximum Leverage? Because to keep within proper risk management rules it's even adviced that traders use less than this?

This question might seem straight forward but it is not, because when you trade you use borrowed money known A.K.A. 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 Silver Trading.

In silver trading the security is known as margin. This is capital you deposit with your broker.

This is calculated in real-time as you trade. To keep your borrowed amount you must preserve what is known-asreferred-to-as the required capital (your deposit).

Now if Your Leverage is 100:1

When trading, if you have $1,000 and use leverage option 100:1 and buy 1 standard lot for $100,000 then your margin on this trade position is the $1000 dollars in your account, this is the money that you'll lose if your open trade transaction moves against you the other $99,000 that's borrowed, they will close out the open trades automatically once your $1,000 has been taken by market.

But this is if your broker has set 0 percent Silver Margin Requirement before stopping out your xagusd trades automatically.

For 20 % prerequisite before closing out your xagusd transactions automatically, then your trades will be closed out once your trading account balance gets to $200

For 50% requisite of this level before stopping out your xagusd positions automatically, then your trade transactions will be closed out once your account balance gets to $500

If they set 100% requirement of this level before closing out your open trade transactions automatically, then your trade will be closed once your trade account balance gets to $1,000: Meaning the trade will close out as soon as you execute it because even if as a trader you pay 1 pip spread your account balance will get to $990 and needed percentage is 100% i.e. 1,000 dollars, therefore your orders will immediately be closed.

Most brokers don't set 100% requirement, but there are those who set 100% aren't suitable for you at all, choose those set 50% or 20 % margin requirements, in fact, those who set at 20% are some of the best since due to the likely hood they stop out your trade transaction is reduced as shown in examples above.

To know about this level that is calculated by your software automatically - The MetaTrader 4 Silver Software will show this as "Silver Margin Requirement", This will be displayed as a percent higher the percent the less likely your transactions are to get stopped out.

For Example if

Using 100:1

If leverage is 100:1 and you transact lots equal to $10,000

$10,000 divide by 100:1, used capital is $100

Calculation:

= Capital Used * %(100)

= $1,000/$100 * %(100)

Silver Margin Requirement = 1,000 %

InvestorTrader has 980% above the required sum

Using 10:1

If leverage is 10:1 and you transact lots equal to $10,000

$10,000 dollars divide by 10:1, used capital is $1000

Calculation:

= Capital Used * %(100)

= $1,000/$1000 * %(100)

Silver Trading Margin Requirement = 100 percent

Investor has 80% above requirement amount

Because when a trader has a higher leverage means that they have more % above what is required(A.K.A. More "Free Silver Margin") their open silver trading positions are less likely to get closed out. This is the reason why traders will choose option 100:1 for their account but according to their risk management trading rules, they won't trade above 5:1 leverage option.

These Areas are Shown on The Software Image Below as an Example:

MT4 Silver Software