Trading Leverage and Margin Explanation & Examples

Margin required : It's the amount of money your broker requires from you to open a trade position. It is denoted in %s.

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

Used margin : sum of money in your account which has already been used up when buying a trading contract, this contract is the one that is shown in open trade positions. You cannot use this amount of money after opening a trade transaction because you have already used it and it is not 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 margin for your account as a collateral to allow you to continue using this leverage he has given to you.

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

However, if you over use xauusd trading leverage, this free margin will go below a certain % at which your broker will have to close out all your transactions automatically, leaving you with a big loss. Broker at this point will automatically close-out all your open trades because if your open transactions are left open then your online broker would lose money that you'd have borrowed from them.

This is why as a xauusd trader should always make sure that you have a lot of free margin. To do this as a trader never trade more than 5 percentage of your trading account, in fact 2 percent% is advised.

Difference Between Gold Leverage Set by the Broker and Used Leverage

If the set leverage option is 100:1, what it means is that as a trader you can borrow upto $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 choose that you want to borrow 50:1 or 20:1. In this instance though leverage option is set at 100:1 your used trading leverage will be the 50:1 or 20:1 that you have 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 xauusd trading lots equal to 50,000 dollars that as a trader you will have used

= 50,000/1000

= 50:1

If you buy xauusd trading lots equal to 20,000 dollars that as a trader you will have used

= 20,000/1000

= 20:1

In these three cases you can see that although the set is 100:1

The used leverage option is 100:1, 50:1, 20:1 based on the size of lots traded.

So Why not Just Choose 10:1 option as the Maximum Gold 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 equity known as Leverage. When you borrow capital from anyone or from a bank you must sustain a security or collateral to get a loan, even if the security is depending on monthly deductions from your own salary, the same thing with Gold Trading.

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

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

Now if Your XAUUSD Leverage is 100:1

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

But this is if your online broker has set 0% Margin Requirements before closing out your xauusd trades automatically.

For 20 percent requisite before stopping out your xauusd positions automatically, then your trades will be closed out once your trading account balance gets to $200

For 50% requisite of this level before closing out your xauusd positions automatically, then your trades will be closed out once your account balance drops to $500

If they set 100% requisite of this level before stopping outliquidating your open trade positions automatically, then your trade position will be stopped out once your trading account balance reaches $1,000: Explanation the trade transaction will close-out as soon as you execute it because even if you pay 1 pip spread your account balance will drop to $990 and the needed percentage% is 100 percent% i.e. $1,000 dollars, therefore your trade orders will immediately get stopped out.

Most brokers do not set 100 percent prerequisite, but there are those that set 100% are not suitable for you at all, choose those set 50 percentage% or 20 percent% margin requirements, in fact, those xauusd brokers which set their margin pre-requisite at 20% are some of the best because the likelihood they close out your trade transaction is reduced as displayed in the above example.

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

For Example if

Using 100:1

If leverage is 100:1 & you trade lots equivalent to $10,000

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

Calculation:

= Capital Used * Percent(100)

= $1,000/$100 * Percentage

XAUUSD Margin Requirements = 1000 %

Investor has 980 percent above required amount

Using 10:1

If leverage is 10:1 & you trade lots equivalent to $10,000

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

Calculation:

= Capital Used * Percent(100)

= $1,000/$1000 * Percentage

XAUUSD Margin Requirement = 100%

Investor has 80% above requirement amount

Because when one has a higher leverage means that they have more percentage above what's required (Also Known As More "Free Gold Margin") their open gold transactions are less likely to get stopped out. This is the main reason why traders will select the option 100:1 for their trading account but according to their risk management guidelines, they won't trade above 5:1 leverage ratio.

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

Leverage & Margin - Margin Level Calculator in MT4

MT4 Software

Study More Courses and Topics:

Trade Gold Trading

Trading Leverage and Margin Explanation & Examples

Difference Between Gold Leverage Set by the Broker and Used Leverage

Now if Your XAUUSD Leverage is 100:1