How can you trade Gold?

0
36

Gold takes its class amongst the precious metals and is popular amongst investors due to its volatility and long-term trends. The metal has been around for thousands of years where it has been regarded as one of the most valued items amongst many. It has been traded as a physical asset in the past, and now it is available readily for most traders through brokers. Market participants can buy and sell higher or choose to short it.

In the forex market, gold is represented as XAU and is frequently paired with the greenback as a base currency. The symbol is XAUUSD. Investors speculate on the prices based on fundamentals and technical factors to make profits.

Various Forms of Gold Trading

There are multiple ways in which investors can invest in gold and trade it. We have listed them below:

  • Physical. It is possible to purchase the yellow metal from a jewelry store and then sell it when the price is higher. This form of trading has been common for a long time.
  • CFDs. Contract for differences is a popular way for trading gold where traders speculate on the price of the metal. When the buy or sell contract ends, they are paid the profits or losses.
  • Gold certificate. It is basically a paper that shows the proof of ownership of gold. Instead of pertaining the asset in physical form, traders can hold the metal in the shape of a certificate.
  • Futures. Gold futures are available at centralized exchanges that allow traders to receive the asset at a designated amount in the future. The contracts may cause swap fees if the investor chooses to hold the asset for the long term.
  • Gold stocks. Traders can invest in the shares of the companies that are actively involved in mining gold. As the demand for the metal increases, the probability that the relevant stocks will rise is also present.

Characteristics of Gold

Before placing your trades on gold for the short and long term, it is essential to understand the critical features such as spreads, volatility, pip size, etc

Volatility

Gold is generally considered a volatile instrument with a high daily pip range in contrast with other assets. It can go on a long-term bullish or bearish trend which is beneficial for swing traders.

Pip

The value of a pip can differ for the instrument gold is paired with. For XAUUSD the pip size is 0.01. It means that the change in price from $1600.00 to $1610.00 will mean a difference of 100 pips.

Manipulation Free

As gold is traded globally with a substantial volume, it is pretty difficult to influence its price. Retail investors can trade it without worrying about spikes in price. A few factors that can influence gold prices are geopolitical conditions, aggressive central bank purchases, and global demand.

Strategies to Trade Gold

There are several strategies traders can use to trade gold. Most of them are built around technical indicators as fundamentals rarely affect the yellow metal. Price action traders frequently scan the charts for support/resistances, supply/demand zone, and other possible scenarios.

Image 1. A price action trader has plotted many support and resistance lines. Notice how the price moves to and fro from the possible points.

Technical indicators such as moving averages, RSI, Stochastic, etc., are also frequently employed. One such strategy is the use of 50 and 100-period moving averages to determine the long-term trends. As the 50 SMA crosses the 100 SMA from below, it triggers a buy and vice versa.

Image 2. Notice how the 50 and 100 MA cross-over triggers a sell-off.

Advantages and Disadvantages of Gold Trading

The benefits of gold trading can be summed up as follows:

  • Safe haven. Gold is considered a safe haven for traders when the markets are in turmoil. It provides a good solution for those who are looking for a low-risk, long-term investment.
  • Profitability. As the volatility of the financial asset is high, it is possible to make quick profits. Volatility is regarded as the bread and butter for traders, and gold has plenty of that.
  • Diversify. By investing in gold, traders are able to diversify their investment portfolios. By trading on gold, you can make money on both the long and short sides.
  • CFD. Trading gold as a CFD trader has access to a good amount of leverage and other benefits such as liquidity and no expiry date.

While a few disadvantages can be stated as follows:

  • Beginners can have a tough time trading gold due to its high volatility.
  • Gold generally has higher spreads than other instruments.