Metals Leverage & Margin Trading Explanation & Examples
Margin required : It is amount of money your metals broker requires from you to open a position. It is expressed in percentages.
Equity : It's total amount of capital you've in your trading account.
Used margin : amount of money in your account that has already been used up when buying a metals trading contract, this contract is one that's displayed in the open trades. As a trader you can't 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 metals broker has opened up a position for you using the capital you have borrowed, you must maintain this usable margin for your account as a security to allow you to continue using this metals leverage he has given you.
Free margin : amount in your trading account which you can use to open new trade positions. This is amount of money in your account that hasn't yet been metals trading leveraged because you've not yet opened a trade with this money - this is also very important for you as a trader because it enables you to continue holding your open trade transactions as described and illustrated below.
However, if you over use metal trading leverage, this free margin will drop below a certain percent at which your metal broker will have to close all your positions automatically, leaving you with a big loss. The metal broker at this point closes all your position because if your positions are left open they would lose the money you have borrowed from them.
This is why you should always make sure you have a lot of free margin. To do this never trade more than 5 percent of your metal account, in fact 2 percent is recommended.
Difference Between Metal Trading Leverage Set by Broker and Used Metals Trading Leverage
If the set metals leverage is 100: 1, it means that you can borrow up to 100 dollars for every dollar that you have in your metals account but you don't have to borrow all the 100 dollars for every dollar you have, but you can decide to borrow 50:1 or 20:1. In this case even though the leverage option set 100:1 your used metals 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
Metals Leverage Used = Amount used /Equity
If you buy metal trading lots equal to 100,000 dollars that you will have used
= 100,000/1000
= 100:1
If you buy metals lots equal to 50,000 dollars you'll have used
= 50,000/1000
= 50:1
If you buy metals lots equal to 20,000 dollars you will have used
= 20,000/1000
= 20:1
In these 3 cases you can see that even though the set is 100:1
The used is 100:1, 50:1, 20:1 depending on the size of metals lots traded.
So Why not Just Select 10:1 option as the Maximum Metals Leverage? Because to keep within proper risk management rules it's even recommended that investors use less than this?
This question might seem straight forward but it's not, because when you trade you use borrowed money known A.K.A. Metals 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 Metals Trading.
In metals trading the security is known as margin. This is capital you deposit with your broker.
This is calculated in real time as you trade. To keep your borrowed money you must maintain what is known as the required capital (your deposit).
Now if Your Metal Trading Leverage is 100:1
When trading if you have $1,000 and use option 100:1 and buy 1 standard lot for $100,000 your margin on this transaction is $1000 dollars in your account, this is the money that you'll lose if your open trade goes against you the other $99,000 that is borrowed, they will close the open metals trades automatically once your $1,000 has been taken by metals trading market.
But this is if your metals broker has set 0% Metals Margin Requirement before closing your metal trades automatically.
For 20% requirement before closing your metal trades automatically, then your trades will be closed once your balance gets to $200
For 50% requirement of this level before closing your metal trades automatically, then your trades will be closed once your balance gets to $500
If they set 100% requirement of this level before closing out your open trades automatically, then your trade will be closed once your balance gets to $1,000: Meaning the trade will close-out as soon as you execute it because even if as a trader you pay 1 pip spread your account trading balance will get to $990 and the needed percent is 100% i.e. 1,000 dollars, therefore your orders will immediately get closed.
Most brokers don't set 100% requirement, but there are those that set 100% aren't suitable for you at all, select those set 50% or 20% margin requirements, in fact, those brokers that set it at 20% are some of the best because the likely hood they close-out your trade is reduced as shown in the example above.
To know about this level which is calculated by your platform automatically - The MT4 Metals Platform will display this as "Metals Trading Margin Requirement", This will be displayed as a percentage the higher the percentage the less likely your trades are to get closed.
For Example if
Using 100:1
If metals leverage is 100:1 & you transact metals lots equal to $10,000
$10,000 dollars divide by 100:1, used capital is $100
Calculation:
= Capital Used * Percent(100)
= $1,000/$100 * Percent(100)
Metals Trading Margin Requirement = 1,000 %
Investor has 980% above the required amount
Using 10:1
If metals leverage is 10:1 & you transact metals lots equal to $10,000
$10,000 dollars divide by 10:1, used capital is $1000
Calculation:
= Capital Used * Percent(100)
= $1,000/$1000 * Percent(100)
Metals Margin Requirement = 100 %
Investor has 80% above the required amount
Because when a trader has a higher metals trading leverage means that they have more percent above what's required(A.K.A. More "Free Metals Trading Margin") their open metals trading transactions are less likely to get closed. This is the reason why traders will select the option 100:1 for their trading account but according to their risk management rules, these traders will not trade above 5:1.
These Levels are Shown on The Software Screen-Shot Below as an Examples:
MetaTrader 4 Metals Platform
