Leverage

Leverage trading or trading on margin, means that you are not required to put up the full value of a position. As a result you can open a significantly larger position than you would be able to if you needed to fund your trade in full. Trading on leverage increases the potential for profit and allows traders to participate in markets that would otherwise be cost prohibitive, but also increases the risks, and so the potential for losses.

One of the key steps in making a Spot Metal trade is determining a trade size, because selecting the correct trade size is critical to effective risk management. How much Spot Gold or Spot Silver you can trade depends on how much money you have in your trading account.

Leverage for Spot Gold and Spot Silver trading is normally set at 100:1. This means that for every $1 you have in your account balance, you can trade $100 worth of a position.

Margin

Margin is the amount of money you must have in your account to open and maintain a position. At 100:1 leverage, your margin factor is 0.01 (1%). This means that you are required to have a minimum cash balance of 1% of the total value of the positions you hold in your account at any one time. If you fall below 1%, your trade may be closed automatically, or, as it is referred to in trading language, liquidated.

Let us look at an example of how leverage works. Let’s say you would like to trade one lot of spot gold.

The current Spot Gold (XAU/USD) price is quoted as 1,550.50 which mean that 1 oz of gold cost $1,550.50.

You buy 1 standard lot (100 oz) of gold at 1,550.50.

Your margin requirement is 1% of your trade size, and is calculated as follows:

Margin Required = Trade Size x Spot Price x Margin Factor

= 100 oz x $1,550.50/oz x 0.01 = $1,550.50.

Another way to look at this example is to say that 100:1 leverage gives you the ability to trade 100 ounces of gold, at 1,550.50, with $1,550.50.

Leverage is what makes Spot Gold or Spot Silver trading an excellent opportunity for beginning traders, who may not have large cash balances. Leverage increases your buying and selling power and lets you participate in a market that may otherwise be cost-prohibitive.

Of course, it is important to keep in mind that increasing leverage also increases risk. You could make greater profits with a leveraged account, but you could also experience greater losses.