Trade Gold Trading

XAUUSD Leverage and Margin Trading Explanation and Examples

Definition of Trade Terms:

Margin required: The cash your broker needs from you to start a position. It's shown as a percentage. Equity: The full amount of money in your gold account.

Used margin is the money from your trading account that's already being used to buy a Gold contract: this XAUUSD contract is the trade you see in your open trades. As a trader, you can't use this money again after you've used it to open a trade because it's already in use and not available until you close that trade.

In short, your broker uses your borrowed funds for trades. You need to hold the used margin as backup. It lets you keep the leverage they offer.

Free margin: The amount of money on your account which you can use to open new trade positions. This is the amount of money on your account that hasn't yet been leveraged because you have not yet opened a transaction with this money - this margin is also very important for you as a trader or investor because it facilitates you to continue holding your open trades as will be shown below.

But, if you use too much leverage, the extra money you have will fall below a point where your online trading company will have to close all of your trades for you, which would cause you to lose a lot of money. The online company closes all your trades at this point because if your trades stayed open, the company would lose the money that it lent to you.

That's why you should always have plenty of free margin, so never trade more than 5% of your balance: 2% is actually better.

Leverage Set by Brokers vs. The Leverage You Actually Use

If the set leverage is 100:1, it means you can borrow up to $100 for every $1 you have, but you don't have to borrow the full $100 for every $1: you can choose to borrow at 50:1 or 20:1. In this case, even if the leverage is set at 100:1, your actual trading leverage will be the 50:1 or 20:1 you borrowed to make a trade.

Example:

You have $1,200 dollars (Equity)

Leverage set 100:1

Leverage Used = Amount utilized / Equity

1 Contract - $120,000 dollars

If you buy 1 standard lot/contract which's equal to 120,000 you'll have used

= 120,000/1200

= 100:1

If you buy one 0.5 contracts/lots which is equal to $60,000 you'll have used

= 60,000/1200

= 50:1

If you execute a purchase of one 0.2 lot/contract, valued at $24,000, this is the amount you will have utilized.

= 24,000/1200

= 20:1

If you buy one 0.1 lots which is equal to $12,000 you'll have used

= 12,000/1200

= 10:1

Even if leverage is set at 100:1, the actual leverage used changes depending on the lot size: 100:1, 50:1, 20:1, or even 10:1.

So Why not just Choose 10:1 ratio as the Maximum Leverage? Because to keep within the proper risk management principles it is even recommended that traders use than this?

This question might look simple, but it's actually more complicated. When you trade as a XAU/USD trader, you use borrowed money, which is called leverage. To borrow money from someone or a bank, you need to offer something valuable as security or collateral. This could even be part of your salary taken out each month. This same idea applies to trading XAUUSD and doing online trading.

Those employing a Gold trading system are required to possess mathematical computations that accurately dictate the required placement of their stop loss order.

During real-time trading, maintaining required capital (deposit) is crucial for keeping borrowed funds viable. For instance, using 100:1 leverage demands specific trader deposits.

If you as a trader have $1,200 in your account and use option 100:1 to buy one standard lot for $120,000, your margin on this transaction is the $1,200 dollars in your account. This is the money you will lose if your open transaction goes against you. The other $118,800 borrowed from your broker will close the open transactions automatically once the market takes the $1,200.

This scenario applies only if your broker has established a 0% Margin Call Requirement for automatically terminating your trade positions.

For 20% Margin Call requirement before closing your trades/transactions automatically, then your positions will be closed once your balance reaches $240 dollars for 50 % Margin Call requirement of this level before closing your trades automatically, then your positions will be stopped out once your balance gets to $600.

If they set 100% Margin Call requirement of this level before closing your open/execute positions automatically, then your position will be stopped out once your balance gets to $1,200: Meaning the trade transaction will closeout as soon as you execute it because even if you pay 10 pip spread your account balance will get to $1,190 and the needed % is 100% i.e. $1,200 dollars, therefore your open orders will immediately get closed by margin call.

Most brokers do not set a 100% margin call requirement: however, some do, which may not be ideal for you. Choose those with 50% or 20% margin requirements: in fact, a 20% margin requirement is preferable as it decreases the likelihood of your trade position being stopped out, as illustrated above.

To find out about the margin level you have used, which your platform calculates for you, the MT4 Platform Software will show it as "Margin Requirement." It will be shown as a percentage, and the higher the percentage, the less likely it is that your trades will be closed.

For Example if

Using leverage 100:1

If leverage is 100:1 and you transact 1 Mini Lot, equivalent to $12,000

$12,000 (mini lot) divided by 100:1 - your used trading capital is $120 dollars

Calculation:

= Capital Used * % (100)

= $1,200/$120 * Percentage (100)

Margin Requirement = 1000 %

Investor has 980% above required amount (because margin call level is 20 %)

Using 10:1

If leverage is 10:1 and you transact 1 Mini Lot, equivalent to $12,000 dollars

$12,000 dollars (mini lot) divided by 10:1 - your used capital is $1200

Calculation:

Equals Capital Invested multiplied by Percentage (100).

= $1,200/$1200 * % (100)

Margin Requirement = 100%

Investor has 80% above required amount (because margin call level is 20 %)

High leverage gives a gold trader extra free margin beyond the minimum needed. This buffer lowers the chance of a margin call closing trades early. That's why many pick 100:1 leverage for their account. But they stick to 5:1 or less per trade to manage risk.

These Margin levels explained above are listed on the MT4 platform and traders can find them like as shown below while trading Gold with the MT4 software.

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