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How To Trade Gold In Forex
Traders have different approaches when it comes to dealing with crisis. But in some cases even the giants like the US dollar and Euro are not doing so great. Which makes us turn our attention to good old gold. Today we will discuss how to trade gold in Forex and where do you start.
How to trade gold
If you are not familiar with gold, it’s a type of precious metal that has been admired by people for centuries. And not just people - think Donald Duck, for example. But in all seriousness, gold is always valuable and that makes it a very important target for traders worldwide.
You might say: last time I checked, gold came in massive bars, so how can it exactly be applied to online Forex trading? Very simple, unlike in the old times, today we don’t actually deal with physical representations of it, but with the equivalent value expressed in futures and options.
Futures and options are contracts that represent an opportunity to buy or sell a certain asset at a agreed upon price at the specific time. The main difference between the two is that futures obligate you to make the specified deal, while options simply give you a right to do so, without any obligations.
Futures are often used to buy in bulk and can be applied to every currently existing market, including Forex, stock market, commodity markets and more. The main reason why traders choose to go with the futures trading is reward optimization. Owning a future contract can significantly increase your earning from one single trade. It is fair to say, however, that it is also capable of proportionally increasing the risk you are taking.
So, as you might have guessed, options are slightly more attractive to the majority, as they offer a right and not an obligation. The major downside is that options are not generally accepted by a lot of brokers. Mostly due to the complexity of the procedure, the broker companies come up with other solutions of letting the traders to work with precious metals, shares, cryptocurrencies and more, while avoiding futures and option trading.
Whichever solution for non-currency assets your broker offers, there are some universal guidelines a Forex gold trader should consider following. Let’s take a few moments talking about gold in Forex trading.
Gold in Forex trading
So far we know two things: gold is always valuable and gold is not traded physically, but rather somewhat hypothetically. It is also important to know that gold is very tightly connected with the United States Dollar and the two tend to majorly affect each other.
Before starting the actual trading process, a Forex gold trader has to first decide on what they will make all their decisions. And just as with any other asset that is being traded on Forex, the wisest way to plan your actions is by analysing the market first.
We know that there are two types of analysis on Forex: technical and fundamental. There is also a subcategory of fundamental analysis, often referred to as market sentiment. Technical analysis covers purely numerical data, including prices, exact dates, times and conditions. Fundamental analysis pays attention to slightly less concrete things, specifically subjective interpretations of political, social and economical events around the world. And sentiment analysis studies the reaction of traders to fundamental data or to specific market conditions.
For the Forex gold trader all of the above are equally important. The technical analysis, especially on longer time frames, shows the dynamic of shiny metal’s value over time. It is fair to mention that this dynamic is a very attractive one for a lot of traders, because despite the occasional minor setbacks, gold seems to always head up. By analyzing the trends, their range and volume, traders can build a set of effective trading strategies. The most common technical analysis based approach to trading gold on Forex is to use previous data to create levels of support and resistance and plan the next moves accordingly.
Fundamental analysis of gold is much more complex for one simple reason - there are so many factors to consider. As we have already mentioned, gold is tied with USD, which means that Forex gold traders will also need to have a good understanding of how the American national currency operates. Then, a lot of attention should be paid to the economical reports of the countries that are responsible for mass export of gold and compare the data with the demand for it. It goes without saying, that if less gold was produced than there is a demand for - the value will increase significantly.
And of course in gold Forex trading, the sentiment plays a large role. Traditionally, the positive sentiment results in lowering value, and negative - in raising. There are different ways of judging sentiment, the most popular of them being evaluation of volatility and volume together.
How to trade Forex successfully
To successfully trade gold, you will need to commit to the idea of learning as much as possible about it. Keep in mind, that currency oriented brokers will most likely charge higher spreads and swaps when it comes to trading shares and commodities. Additionally, you will need to keep a hand on the pulse of many aspects from demand on golden jewelry to the tendencies of the United States Dollar and other major currencies. Let’s briefly summarize the gold trading tips to help you better understand if this type of trading is for you:
Consider the risk. This is applicable for all sorts of trading, but this doesn’t mean we shall disregard it as we speak about gold. Precious metals are a great way to diversify your portfolio and in many cases they are the only solution to optimize your income in difficult scenarios. However, there are always risks considered with trading valuables and you will need to remain thinking clearly throughout the whole process.
Master analysis. Specifically look at the factors that impact gold value directly, including the dynamic of the US dollar and worldwide economic releases. You will need to come up with your own, individually tailored combination of technical, fundamental and sentiment analysis to get the proper picture of the situation. The best advice here is: start small and only focus on a few factors and then gradually add more.
Evaluate the demand. Pay attention to both retail and industrial demand for gold and golden jewelry. There are still countries and cultures where gold is considered a wise investment, by default this raises the value and leads to more trade opportunities. You can get this information from a variety of sources, such as performance reports of big gold retailers, export and import data worldwide. Also watch out for central banks behavior towards gold and gold related assets to get a feeling of what might happen next.
Stay educated. Remember that you are not trading actual gold, but the representation of its value, which means that there are going to be factors that will change periodically and you will need to stay updated and informed on everything that is happening. Good news is, there are so many ways to learn and so many formats, that you will most likely find just the right path of action.
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