Difference: Maximum Leverage Set by Broker & Used Leverage

Difference Between Maximum Leverage Set by the Broker and Used Leverage

If the set leverage option is 100:1, what this means is that you as a trader can borrow up to $100 for every one dollar that you have on your account, but you don't have to borrow all the $100 for every one dollar that you have, you as a trader can choose and select that you want to borrow 50:1 or 20:1. In this instance though leverage ratio is set at 100:1 your used leverage will be the 50:1 or 20:1 which you've borrowed to make a trade position.

Example:

You have $1000 dollars (Equity)

Set 100:1

Leverage Used = Amount used /Equity

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

= 100,000/1000

= 100:1

If you buy lots that are equivalent to $50,000 you'll have used

= 50,000/1000

= 50:1

If you buy trading lots which are equivalent to $20,000 dollars you'll have used

= 20,000/1000

= 20:1

If you buy lots that are equal to $10,000 you'll have used

= 10,000/1000

= 10:1

In these 3 cases you as a trader can see that even though the set is 100:1

The used leverage option is 100:1, 50:1, 20:1 & 10:1 depending on the position size of lots traded and transacted.

So Why not Just Choose 10:1 ratio as the Max Leverage? Because to keep within proper risk management rules it's even advised that traders use lesser than this?

This question might seem straight forward but it's not, because when you trade you use borrowed money known as Leverage. When you borrow capital from anybody or a bank you as a trader must keep a collateral or security to obtain a loan, even if the collateral is depending and based on monthly deductions from your salary, the same thing with Gold Trading.

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

This is calculated in real time as you trade. To keep your borrowed money you as a trader must sustain what is known and referred to as required capital (your deposit).

Now if Your Leverage is 100:1

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

But this is if your online broker has set 0 % Margin Requirements before stopping out your gold trade positions automatically.

For 20% requisite before stopping out your gold positions mechanically, then your trade positions will be stopped out once your account balance gets to $200

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

If they set 100 percent prerequisite of this level before closing out your open trade positions mechanically/automatically, then your trade will be closed once your account balance reaches $1,000: Explanation the Gold trade position will closeout as soon as you open it because even if you pay 1 pips spread your account balance will drop to $990 dollars and the needed percent is 100 % i.e. $1,000, henceforth your open position orders will immediately be stopped out.

Most brokers do not set 100% requisite, but there are those that do set 100% aren't suitable for you at all, select those set 50 % or 20 % margin requirements, in fact, those xauusd brokers that set their margin requirement at 20% are among some of the best since because of the likely hood they stop out-out your trade position is reduced and minimized just as is displayed and shown in the above example illustration.

To know about this level that is calculated by your platform software automatically/mechanically - MT4 Software Platform will show this as "Gold Margin Requirement", This will be displayed as a % the higher the % the less ikely your positions are to get closed out.

For Example if

Using 100:1

If leverage is 100:1 & you transact 1 Mini Lot, equals to $10,000 dollars

$10,000 (mini lot) divided by 100:1, your used trading capital is $100 dollars

Calculation:

= Capital Used * Percent(100)

= $1,000/$100 * Percentage

XAU/USD Margin Requirements = 1000%

Trader has 980 percent above the required amount

Using 10:1

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

$10,000(mini lot) divided by 10:1, your used equity is $1000

Calculation:

= Capital Used * Percentage

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

Gold Margin Requirement = 100%

Investor has 80% above the required amount

Because when one has a higher leverage means they have more percent above what is required (A.K.A. Known As More "Free Gold Margin") their open gold positions are less likely to get closed out. This is the explanation why traders will select the choice/option 100:1 for their account but according to their risk management rules, they won't trade above 5:1 leverage ratio.

These Levels are Displayed on the Trade Software Platform Screenshot Below as an Example:

Maximum Leverage Set for Account - Max Leverage on Trade Account Explained

MT4 Platform

Study More Tutorials and Topics:

Trade Gold Trading

Difference Between Maximum Leverage Set by the Broker and Used Leverage

Now if Your Leverage is 100:1