Difference Between Maximum XAUUSD Leverage Set by the Broker and Used XAUUSD Trading Leverage
If the set gold trading leverage ratio is 100:1, what it means is that you can borrow up to 100 dollars for every dollar you have in your account, but you do not have to borrow all the 100 dollars for every dollar you have you can decide you want to borrow 50:1 or 20:1. In this case though the leverage option is set at 100:1 your used gold trading leverage will be the 50:1 or 20:1 that you have borrowed to make a trade.
Example:
You have 1000 dollars (Equity)
Set 100:1
Gold Leverage Used = Amount used /Equity
If you buy trading lots that are equal to 100,000 dollars you will have used
= 100,000/1000
= 100:1
If you buy trading lots that are equivalent to 50,000 dollars you will have used
= 50,000/1000
= 50:1
If you buy trading lots which are equivalent to 20,000 dollars you will have used
= 20,000/1000
= 20:1
If you buy trading lots that are equivalent to 10,000 dollars you will have used
= 10,000/1000
= 10:1
In these 3 cases you can see that even though the set 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 Select 10:1 option as the Maximum Gold Trading Leverage? Because to keep within proper risk management rules it's even recommended 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. Gold Leverage. When you borrow capital from anyone or a bank you must maintain a security or collateral to acquire a loan, even if the security is based on monthly deduction from your salary, the same thing with Gold Trading.
In gold trading the security is known as margin. This is the 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 the required capital (your deposit).
Now if Your XAUUSD Trading Leverage is 100:1
When trading if you have $1,000 & use option 100:1 & buy 1 standard lot for $100,000 your margin on this transaction is the $1000 dollars in your account, this is the money that you will lose if your open trade goes against you the other $99,000 that is borrowed, they will close the open gold trades automatically once your $1,000 has been taken by the xauusd market.
But this is if your gold broker has set 0% Gold Margin Requirement before closing your xauusd trades automatically.
For 20% requirement before closing your xauusd trades automatically, then your trades will be closed once your trading account balance gets to $200
For 50% requirement of this level before closing your xauusd trades automatically, then your trades will be closed once your trading balance gets to $500
If they set 100% requirement of this level before closing out your open positions automatically, then your trade will be closed once your account balance gets to $1,000: Explanation the trade will close-out as soon as you execute it because even if you pay 1 pips spread your account balance will get to $990 and the needed percent is 100% i.e. 1,000 dollars, therefore your orders will immediately get closedout.
Most brokers do not set 100% requirement, but there are those that set 100% are not suitable for you at all, select those set 50% or 20% margin requirements, in fact, those xauusd brokers which set their margin requirement at 20% are some of the best because the likely hood they close-out your trade is reduced as displayed in the example above.
To know about this level which is calculated by your trading platform automatically - MetaTrader 4 Gold Trading Platform will display this as "Gold Margin Requirement", This will be displayed as a percent the higher the percentage the less likely your trades are to get closed.
For Example if
Using 100:1
If gold leverage is 100:1 & you transact 1 Mini Lot, equals to $10,000
$10,000 dollars(mini lot) divide by 100:1, your used trading capital is $100
Calculation:
= Capital Used * Percentage(100)
= $1,000/$100 * Percentage(100)
Gold Margin Requirement = 1,000 %
Investor has 980% above required amount
Using 10:1
If gold leverage is 10:1 & you transact 1 Mini Lot, equals to $10,000
$10,000 dollars(mini lot) divide by 10:1, your used capital is $1000
Calculation:
= Capital Used * Percentage(100)
= $1,000/$1000 * Percent(100)
Gold Trading Margin Requirement = 100 %
Investor has 80% above required amount
Because when a trader has a higher gold leverage means that they have more percentage above what's required(A.K.A. More "Free Gold Trading Margin") their open gold trading transactions are less likely to get closed. This is the reason why traders will select the option 100:1 for their account but according to their risk management rules, they will not trade above 5:1.
These Levels are Shown on the Software Image Below as an Examples:
MetaTrader 4 XAUUSD Trading Software
