Friday, July 3, 2009

The Benefits of Leverage in Spot


One of the key steps in making a spot gold trade
is determining a trade size, because selecting the
correct trade size is critical to effective risk
management.
How much spot gold you can trade depends on how
much money you have in your trading account as well
as the online trading firm’s leverage and margin
requirements.
Typically, online forex trading firms will allow leverage of 50:1 for spot gold. If you can trade spot gold on a margin of 50:1, for every $1 you have in your account you have $50 in buying and selling power for spot-gold trading. In other words, a $5,000 account can trade up to $250,000.
Margin is the amount of money you must have in your trading account to make a particular trade. At 50:1 leverage, your margin requirement would be 0.02, or 2%. This means you must have a minimum cash balance of 2% of the total value of your spot gold positions. If you fall below 2%, your trade may be closed automatically, or, as it is referred to in trading language, liquidated.
Let's look at an example of how leverage works. Let’s say you would like to trade one lot of spot gold (which, as we have mentioned in other articles, equals 10 troy ounces) at $820.50. So, your total trade size would be 10 X $820.50, or $8,205. Since your margin requirement is 2% of your trade size, the amount of cash you would need in your account would be $8,205 x 0.02, or $164.10. If your account balance falls below this level, your trade will be automatically closed.
Leverage is what makes online spot-gold trading an excellent opportunity for beginning gold 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. In the example above, for example, 50:1 leverage gave you the ability to trade 10 ounces of spot gold at $820.50—a value of $8,205—with just $164.10.
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.

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