Leverage and Margin Explanation and Examples

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

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

Used margin : sum of money on your account which has already been used when opening a trading contract, this contract is the one that is displayed and illustrated and shown on open positions. You can't use this amount of money after opening a trade transaction because you have already used it & it's not available to you.

In other terms, 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 that the broker has assigned to you.

Free margin : amount in your account which you as a trader can use to open new trades. This is the amount of money on 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 trades as will be explained below.

However, if you over use gold leverage, this free margin will go below a certain % at which your broker will have to close out all your transactions mechanically/automatically, leaving you with a big loss. Broker at this point will automatically close-out all your open positions 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 gold trader should always ensure 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 you as a trader can borrow upto $100 dollars for every dollar you have on your account, but you do not have to borrow all the $100 dollars for every dollar 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 option is set at 100:1 your used 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 gold trading lots equal to $50,000 that as a trader you'll have used

= 50,000/1000

= 50:1

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

= 20,000/1000

= 20:1

In these three cases you as a trader 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 and transacted.

So Why not Just Select 10:1 ratio as the Maximum Gold Leverage? Because to keep within proper risk management rules it's even recommended 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 anyone or from a bank you as a trader must sustain a collateral or security to acquire a loan, even if the collateral is depending and based 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 realtime 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 XAUUSD Leverage is 100:1

When trading, if you 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 dollars in your account, this is the money that you will lose out if your open trade goes against you, the other $99,000 that is borrowed, they'll stop out the open gold transactions 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 closing out your xauusd trade positions automatically.

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

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

If they set 100% requisite of this level before stopping out your open position positions mechanically/automatically, then your trade position will be stopped out once your trading account balance reaches $1,000: Explanation the trade position will closeout 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% aren't suitable for you at all, choose those set 50 percentage or 20 percent margin requirements, in fact, those xauusd brokers that set their margin pre-requisite at 20% are among some of the best because the likelihood they close out your trade is reduced and minimized such as displayed and shown in the above example.

To know about this level that is calculated by your software automatically/mechanically - MetaTrader 4 Platform will show this as "XAUUSD Margin Requirement", This will be displayed as a percent the higher the percentage the less likely your open trades 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 divided by 100:1, your used capital is $100 dollars

Calculation:

= Capital Used * Percent(100)

= $1,000/$100 * Percentage

XAU/USD 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 divided by 10:1, your used equity is $1000 dollars

Calculation:

= Capital Used * Percent(100)

= $1,000/$1000 * Percentage

XAU/USD Margin Requirement = 100%

Investor has 80% above the requirement amount

Because when one has a higher leverage means 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

MetaTrader 4 Platform

Study More Courses and Topics:

Trade Gold Trading

Leverage and Margin Explanation and Examples

Difference Between Gold Leverage Set by the Broker and Used Leverage

Now if Your XAUUSD Leverage is 100:1