Trade Gold Trading

How Leverage Increases Gold Trading Profits and Losses

If you, as a trader, have a $1,200 trading account with 100:1 leverage, the most you can buy is 1 lot, equaling $120,000 of Gold (1 Standard lot).

Let us calculate profits and losses based in 3 examples of used leverage, based on $1,200 XAUUSD trading account:

  • 1 lot (100:1)
  • 0.5 lots (50:1)
  • 0.2 lots (20:1)

Note: This figure reflects the leverage actively employed, not the maximum available leverage. If an online Gold brokerage offers 100:1 leverage, yet you only transact 0.1 lot, the leverage being utilized is actually 10:1. However, transacting a full contract means you tap into the 100:1 leverage, matching the Maximum leverage (100:1).

The example below shows leverage based on trade size. It matches the position you opened.

Example 1: (100:1 Leverage or 1 Lot)

For 1 lot 1 pip equals $1

If you earn a profit of 100 pips, the calculation of trading profit amount in dollar terms is:

1 lot

1 pip = $1

100 pips = 100 * 10 = $100 dollars

Total = balance + profit

= 1000+ 100

= $1,100 you have just made 10% profit in your equity balance.

If you make a loss of 100 pips, the loss amount in terms of dollars is:

1 lot

1 pip = $1 dollars

100 pips = 100 * 10 = $100

Total = account balance - loss

Total= 1000 - 100

Total = $ 900 you have just lost 10% of your trading account balance

Example 2 :(50:1 Leverage or 0.5 Lots)

For 0.5 lots 1 pip equals $0.5

If you earn a profit of 100 pips the profit amount in dollar terms is:

0.5 lots

1 pip = $0.5

100 pips = 100 * 0.5 = $50 dollars

Total = balance + profit

= 1000+ 50

= $1,050 you have just made 5% profit of & added it to your account balance

If you accrue a loss of 100 pips, the loss amount in terms of dollars is:

0.5 lots

1 pip = $0.5 dollars

100 pips = 100 * 0.5 = $50

Total= trading account balance - loss

Total= 1000 - 50

Total= $950 you have just lost 5% of your account balance

Example 3: (Leverage 20:1 or 0.2 Lots)

For 0.2 lots one pip equals $ 0.2 dollars

If you make a profit of 100 pips the profit amount in dollar terms is:

0.2 lots

1 pip = $0.2 dollars

100 pips = 100 * 0.2 = $20

Total=balance + profit

= 1000+ 20

= $1,020 you have made lost 2% of your account balance

If you make a loss of 100 pips, the loss amount in terms of dollars is:

0.2 lots

1 pip = $0.2

100 pips = 100 * 2 = $20 dollars

Total = account balance - loss

Total= 1000 - 20

Total= $980 you have just lost 2% of your account balance

In the example, you see that more leverage means bigger wins or losses, while less leverage means smaller wins or losses.

As a trader, it is advisable to utilize less leverage to reduce the risks linked with online Gold trading. Higher leverage increases the risk, which is why a fundamental rule of equity money management advises against trading with more than a 5:1 leverage ratio at any time.

In leverage guidelines: It's recommended to stay below 10:1 leverage ratio which's also still high, most professional money managers use 2:1 leverage meaning that they only trade 2 lots/contracts for every $120,000 in their XAU/USD trading account. Hence, to trade one standard lot the money managers will maintain and have a total $60,000 dollars as their equity balance.

When trading gold, it is advisable to open an XAU/USD account with a minimum of $10,000 if trading Gold Standard lots. For those trading XAU/USD Mini lots, a minimum account balance of $1,000 to $2,000 is recommended.

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