Education:We have covered some important areas regarding gold trading in this education guide for you to have a basic understanding of spot gold trading as we believe you should know what you are getting into before investing your money. Please keep visiting this area of website frequently as we will update it on regular basis in order to enhance your trading knowledge and skills.
Main Markets for Physical Gold:
The main world markets for physical gold are in London and Zurich - London is considered as pre-eminent though.Accessibility to London market?
Individuals have no access to London market due to two major hurdles:1. Deal-size. London Good Delivery Bar is considered the most liquid physical bullion form which weighs about 400 troy ounces (12.4 kilograms). At a price of $500 an ounce each bar is worth about $200,000. And the fact is more serious buyers don’t settle at buying one bar as they prefer to have at least $500,000.
2. The second is the setting up of a relationship. It is not easy to open an account as just buying large quantity may not be good enough reason and there are a number of logistical, regulatory and commercial issues involved as logistically whether it needs to be stored or delivered, transportation and vaulting arrangements can take quite a lot of setting up. Due to the tighter regulatory regime there is a greater obligations on firms if they deal with the public – Dealers find it unattractive and time consuming to have private investors due to the effects of logistics and regulatory complexities.
Over The Counter trading [OTC]
The London gold market is an Over The Counter market - which means that buyers and sellers choose each other, and do not necessarily find the best price on an exchange floor purely through price competition between different players.Buying gold is more like shopping in a rather exclusive shopping centre than trading in a modern financial marketplace. The [gold] shopkeeper tells you his price and you take it or leave it without benefiting from an immediate direct comparison with other players - which is what you would normally find on an exchange.
So on the face of it a big advantage with an OTC structure is that each participant is sufficiently isolated from the infrastructure of the market that a serious financial problem at one member is unlikely catastrophically to infect the rest of the marketplace.
Gold Trading Vs Investing in Gold:
A lot of people wonder why trade gold instead of investing in gold. Gold has been considered as a precious metal for thousands of years and many people shy away from buying it because they think they can only do so by investing – Trading gold provides them another option.The traditional way to invest in gold is to buy physical gold in the form of bars or coins. The problem with buying physical gold is that it involves considerable transportation and storage costs. Another hurdle is that physical gold is relatively less liquid so it may be hard to find a buyer if you wish to sell it.
Another way to invest in gold is by buying gold stocks, such as mining companies, either individually or through mutual funds. This option provides investors exposure to more liquid gold market than physical gold but it still lacks the pure gold exposure many traders demand.
Gold-related exchange traded funds (ETF) is another option which is a pool investment and trade on exchange like stocks. Gold ETFs are a way to trade physical gold in a sense as they are intended to track a percentage of an ounce of gold. Although ETFs provide speculators to buy as well as sell it short but administrative costs can be unattractive to many investors.
You can invest in a paper representation of gold, such as Futures and Options. Futures and options are contracts or options to buy or sell a specific security or commodity (such as gold) at a specific price at a specific time. Futures contracts are used to trade gold in the short-term; rarely does a gold trader take delivery of the gold. While trading gold with a futures contract does have “counterparty” risk—the possibility that the person on the other side of the contract won’t deliver—the fact that gold contracts are traded on established exchanges minimize the possibility of losing money when trading gold.
Finally, you can trade so-called spot gold, which lets you take a long or short position in gold while simultaneously taking the opposite position in the U.S. dollar. So trading gold is much like trading forex pairs. We’ll talk about trading spot gold more in another article.Introduction to Spot gold Trading:
Trading gold futures and gold options are appealing ways to speculate on the price of gold or to hedge risk. But trading spot gold has the added benefit of bringing the U.S. dollar into the mix.
When you trade spot gold, you take a long or short position in gold at the same time that you take the opposite position in the U.S. dollar. (That, incidentally, is similar to the positions you would when trading forex pairs.)
Spot gold trades globally in an over-the-counter (OTC) market. The market is available 24 hours a day, from Sunday at 6:00 p.m. Eastern time until Friday at 5:00 p.m. Eastern time, making it ideal for traders around the world.
You can trade spot gold online via a number of forex trading sites. Prices fluctuate based on supply and demand (although the twice-daily gold fix in London helps set a reference point for prices). The price of gold in the spot gold market—called the “spot price”—is the price quoted for the spot gold, including delivery, to be paid two days following the date of the actual transaction. This day is called the settlement date. Settlement for spot gold is similar to forex settlement, which we talk in more detail in “ Spot Gold-Tradin g Methods.”
The best time to trade is when European market hours overlap with New York market hours, which essentially amounts to four hours of morning trading for U.S. traders.
How To Trade Spot Gold?
Trading spot gold is an attractive way to speculate on the price of gold or to hedge risk. When you trade spot gold, you take a long or short position in gold at the same time that you take an opposite position in the US dollar.It is similar to trading forex as you simply trade gold and the US dollar instead of two currencies, Reading spot gold is also similar to reading a forex quote and represented the same way (XAU/USD).
Pricing in the spot gold market is similar to pricing in any financial market. There is a price at which participants are willing to buy spot gold (called the Ask) and a price at which they are willing to sell spot gold (called the Bid). The difference between Ask and Bid price is called spread. Spot-gold trading is a fast-moving market, and the bid and ask change quickly throughout the day.
To have a better understanding of what is mentioned above; let’s say you receive a quote for spot gold that looks like 1100 / 1100.50. This means that you could sell spot gold at $1100, or buy at $1100.50.
To show you how trading spot gold works, let’s say you buy a single lot of gold (100 troy ounces) at $1100 per ounce, so $110,000 total. The spot gold market rallies, and a few hours later you sell the spot gold at $1105 per ounce, or $110,500 total. You made a profit of $500 in this trade. You could also say you made 500 “pips.” What is a pip? Like forex prices, spot gold prices are quoted in small increments called percentages in point, or pips. Each pip represents $0.10
That may not seem like much, but remember, you will likely to have many such contracts once you trade and because you don’t actually have to pay $110,000 for each contract as you actually need to put down a fraction of amount. We’ll talk more about that in “Leverage in spot gold” section.
Finally, note that spot gold can be traded both long and short multiple times throughout the day, given that the market moves so quickly.
How to read spot gold quote:
As mentioned above when trading spot gold, you take a long or short position in gold while take a counter position in US dollar. It is however, important to understand how to read a spot gold quote.
As in other financial markets, including forex, spot gold quotes consist of two sides: the bid and the ask. The bid is the price at which you can sell, and the ask is the price at which you can buy.
Before we move on, note that spot gold prices are quoted in US dollars per “troy” ounce. So, a quote of 1100 means that one ounce of gold equals $1100.
Note that you might receive a quote for spot gold that looks like 1100 / 1100.5. This means that you could sell a lot of spot gold at $1100, or buy at $1100.5. So, the spread which is the difference between the bid price and ask price is $0.5.
In short if you buy spot gold and sell it at a higher price, your profit is simply the difference between these two prices.
The first thing it is important to know about reading a spot gold quote is that the quote looks similar to a forex quote, being represented the same way (XAU/USD). The first symbol listed represents one troy ounce of gold. So the price quote—which may look something like 1100 XAU/USD simply means that one ounce of gold is equal to $1100 U.S. dollars. (The dollar amount fluctuates, of course.)
To have a better understanding of what is mentioned above; let’s say you receive a quote for spot gold that looks like 1100 / 1100.50. This means that you could sell spot gold at $1100, or buy at $1100.50.
To show you how trading spot gold works, let’s say you buy a single lot of gold (100 troy ounces) at $1100 per ounce, so $110,000 total. The spot gold market rallies, and a few hours later you sell the spot gold at $1105 per ounce, or $11,050 total. You made a profit of $500 in this trade. You could also say you made 500 “pips.” What is a pip? Like forex prices, spot gold prices are quoted in small increments called percentages in point, or pips. Each pip represents $0.10.
Spot gold Trading-Step by Step:
These days online platforms have made life a lot easier for individual investors to trade stocks, currencies, commodities and various other financial instruments. Trading spot gold may seem complicated at the start but following step by step guidelines will guide you through the process.
Let’s say you believe price of spot gold will rise by reading some news reports and listening to some expert comments on Financial news channel. You decide to follow their opinion and buy (or go long) the XAU/USD. Here is how it’s done:
1. You can see the bid and ask prices on your platform changing rapidly as it’s a fast moving market. Since you believe gold price will rise in the above example you would buy or go long XAU/USD at 1100.50.
2. Select the correct trade size as it is critical to effective risk management. Since spot gold is traded in Lots where one lot is equal to 100 oz of gold. Our online MT4 platform (provided by Alpari UK) provides facility to trade as low as 0.1 Lot so you can start trading with small amount which helps to make you feel confident. Different online platforms have different margin requirements and we offer 100:1. So if you trade spot gold on margin of 100:1, it means a HK$ 50,000 account can trade up to 5,000,000.
3. Review the spread: Like any other financial market, spread is the difference between Bid and Ask prices. So, in the above example you could buy or go long at 1100.50 and sell or go short at 1100.00. There is 50 point or pip spread, The spread on some platforms fluctuate especially when an important data is about to be released but good news is our platform offer fix 50 pips spread and does not fluctuate.
4. Make the trade: So now let’s assume you are long a single lot of XAU/USD—a lot equaling 100 ounces—at $1100 per ounce, so $110,000 total. The spot gold market moves in your anticipated direction and a few hours later you sell the spot gold at $1105 per ounce, or $110,500 total. Your profit is $500 or 500 pips. We strongly recommend you to have Stop Loss and Limit orders in place when entering a trade to minimize the risk. We will talk about different tyupes o orer types later in the section.
5. Analyze the market and make the trade again. Finally, keep in mind spot gold can be traded in either direction multiple times throughout the day, given that the market moves so quickly.
Leverage and Margin:
How much spot gold you can trade depends on how much money is available to trade in your account as well as the online trading firm’s leverage and margin requirements. As mentioned above our online MT4 trading platform (provided by Alpari UK) provides 100:1 leverage which means for every $1 you have in your account you can trade $100 worth of spot gold.
Margin is the minimum amount of money required to maintain an open position (or trade). At 100:1 leverage, the margin requirement would be 0.01 or 1%. This means you must have a minimum cash balance of 1% of the total value of your spot gold positions. If it falls below 1%, your trade may be closed or liquidated automatically.
To explain leverage further, let’s have a look at an example as how it works. Let’s say you would like to trade one lot of spot gold (which, as mentioned earlier, equals 100 troy ounces) at $1150.50 and leverage offered by online firm is 100:1. So, your total trade size would be 100 X $1150.50, or $115,050. Since your margin requirement is 2% of your trade size, the amount of cash you would need in your account would be $115,050 x 0.01, or $1150.50. If your account balance falls below this level, your trade will be automatically closed.
In short, Leverage provides an excellent opportunity for both beginners and experienced gold traders who may not have access to large cash balances. Due to this feature, individual and small investors are able to participate in a market that may otherwise be cost-prohibitive. Although leverage enhances your purchasing ability but it is important to keep in mind that it also increases risk. Leverage is referred to as double edge sword, but if used wisely rewards could be unlimited.
Different types of orders:
Market Order: It allows you to buy or sell at the current market price and can be used to enter or exit a trade.Although market orders provide instant execution of your order but it should be handled with care because in fast moving market such as spot gold, there may be a difference between the price you actually see and click to enter a trade and actual price of transaction. This is referred to as slippage-difference of amount between placing an order and its execution and result could be loss or gain of several pips.
Limit Order: is a type of order which lets you buy or sell at a price specified by you. It can be used to buy below the market price or sell above the market price.
When buying, your order is executed when the market falls to the level you preset your limit order to and in case of selling, your order is executed when the market rises to that level. Having limit order set eliminates the chances of any slippage factor.
Stop Order: is an order which lets you buy above the market or sell below the market. It is commonly known as Stop-Loss order; to help you limit your losses incase market moves to the opposite direction than anticipated. When buying, a stop loss order will sell the spot gold if the market falls below the point set by you or when selling, will buy the spot gold if the market rises above the point set by you.
Trading without stop loss orders is like driving a vehicle without brakes. We strongly recommend setting your stop loss order when you enter a trade and do not move stop losses because doing so will only increase your losses most of the time.
One Cancel the Other (OCO) Order: It is used when placing a stop-loss and limit order at the same time. Execution of either order cancels the other one thus allowing traders to set up a trade without having to monitor the market. If market moves to opposite direction than anticipated, the stop-loss order will be triggered otherwise if it moves in your anticipated direction, limit order will be executed and position will be closed with a profit.
Example of OCO order:
Buy: 1 single Lot of spot gold @ $1150.00
Pip Value: 1 pip = $0.10
Stop Loss: 1145.00
Limit: 1160.00
This is an order to buy spot gold at 1150.00 and to sell if it falls to $1145.00 (in a loss of 5000 pips or $500) or to sell if price rises to $1160.00 (profit of 10000 pips or $100).
To understand and learn Spot Gold trading it is beneficial to learn about some core aspects of Gold itself as different types of gold, who determines the gold prices, why gold coin prices can be more or less than spot gold prices etc. Some people might think what this information has got to do with trading gold but to be a good trader you need to know the factors that may influence gold price directly or indirectly. So purpose of this guide is not only to guide you through the whole trading process but also to develop a better understanding of fundamentals.
Different Types of gold:Scrap Gold:
According to the website Gold Price, "Scrap gold can include any products that are made of gold or include gold in its manufacture." Regardless of the condition the gold is in, refiners can always recover its value.Value of scrap gold is determined by its Karat weight i.e. 10K, 14K, 18K, 22K or 24K. The Karat value is actually related to the purity of gold- so higher the Karat value, the greater the percentage of gold. Simply, we can say 24K is pure or 100% gold where as 10K has minimum percentage of gold in it. Normally you will find Karat marking on the inside of any gold jewelery you purchase.
Although 100% gold values the most yet it is not the most durable form of gold due to its softness. In order to strengthen and increase the durability of gold it is mixed with other alloys such as copper, zinc and silver etc.
Due to recent sharp hike in gold prices, selling scrap gold can be really profitable and means to generate extra cash. Selling gold at desired price may not be an easy task so best would be to shop around on the internet to find a dealer or refiner directly instead of a jeweler or pawn broker who will have their own cut. Always remember to remove any embedded stones before selling your gold jewelery.
Physical Gold
Owning gold in physical form has no other parallels as in hard times it may be your only saviour. But it comes with a price to pay for storage and insurance and depending on net worth it can be very costly.In order to buy bullion, always buy it from a reputable source and in a form that is highly liquid for resale. Many local and online dealers provide high quality bullion these days but if buying online always consider shipping costs, applicable taxes and price.
As we mentioned above gold liquidity, that depends on its purity the reputation of assayer’s guaranteeing the purity. The most popular is minted by national governments such as the U.S., Canada, Australia, Switzerland and South Africa and are easy to sell as compared to bullion offered by mining companies which may offer a better value.
Paper Gold: We can define paper gold as “A measure of a country's reserve assets in the international monetary system. also called Special Drawing Rights (SDR)”.Another definition is “Certificates that can be converted into gold at the offices of the issuer of the paper, private or government. Paper gold often is used in exchange since it is much less cumbersome than the actual metal”.
Before ETFs were launched, mining companies, national mints and dealers used to sell shares of a gold pool that would offer paper ownership of physical gold which could be later resold but generally not redeemable for physical gold. With the advent of Exchange Traded Funds and Exchange Traded notes which offer and easy way to buy or sell much like stocks and generally track the gold price.
If you are good with taking risk then speculate on gold futures as it only involves speculation and no delivery of physical gold is intended. Trading futures can be a dangerous game as substantial leverage increases the risk factor that’s why only experienced traders should invest in gold futures.
Understanding the Risks:
Whether you trade stock, currencies or gold they all have certain degree of risk involved as you may lose some or all your money. So before you consider trading analyze your attitude to risk and only invest you can afford to lose( I know you have heard that many time before but I can’t stress enough how important this basic rule is). I came across with a very nice article written by Bradley Gareiss, a Technical Analyst from GFT regarding Accepting the Risk and would like to share it with you as it provides a great insight on the topic.
“Trading psychology is the most important aspect of a trader's success. I have made this statement before, but it is worth repeating. There are many factors that contribute to a trader's psychological makeup, and there is no easy way to attain a trader's mindset. However, there are certain factors that influence a trader's psychology that are important to be aware of. Several weeks ago we published a feature that covered how a trader should deal with a drawdown ( Trading Psychology- Dealing with a Drawdown ). That feature discussed the psychological implications of losing over a series of trades. Today's topic, accepting risk, pertains to individual trades rather than a long string of trades.
The best traders typically are the most consistent traders. In order to be a consistent trader, it is important to consistently apply one's methodology to the market and make as few errors as possible. A trading error is when a trader deviates from their methodology. Common errors include taking a bigger loss than planned, exiting a trade earlier than planned, taking a trade that does not fit the trader's usual criteria, or passing on a trade that fit the trader's usual criteria. These errors can be destructive to a trader's capital and sanity.
Good traders spend a vast number of hours studying gold price analysis and forecast, they use technical analysis and fundamentals to forecast the next moves of gold price. They use previous gold price trends analysis to project what they think could happen to gold price, and with their reports on gold price forecast, they plan ahead on when to set up trades and at what prices to take profits and cut losses.
Trading errors are usually induced by emotions caused by previous trades. The most dangerous emotional catalyst (in my opinion) occurs when a trader loses a trade they felt was a certain winner. After losing this trade, a trader feels sad, angry, or even vengeful against the market. This causes a trader to enter a trade irrationally in order to win back what they felt they were cheated out of. Of course, this trade usually is a loser. If it wins, this can be even worse, because it encourages this type of decision making in the future, which could lead to even larger losses.
In my opinion, the reason the aforementioned scenario is common among traders is that they did not accept the risk when they placed the trade. They thought the trade was a sure winner, so it was miserable to take the trade as a loss. In fact, traders may even refuse to take their loss because they were so sure it was a winner, which can lead to devastating losses. This is why traders must accept the risk of each trade before they enter their position. In other words, a trader must view the amount of money they are risking as an expense to see if their trade idea will work. Once a trader accepts the risk, they will typically feel far less distress if the trade does indeed lose.
Accepting the risk of each trade is not easy, especially for inexperienced traders. Of course, there are some steps we can take to make it easier to accept the risk. First, it is very important to plan out each trade. This means we should know where we will enter the trade, place our stop, and place our take profit level(s). That way there are no decisions that need to be made once the position is entered. The human brain will view information differently once that position is entered and it thinks much more clearly before the position is entered. Additionally, if we know the distance between the entry and the stop, we know exactly how much capital we are risking. This is important because it is impossible to accept a risk when we do not know how large the risk is. After entering the pre-planned trade, emotion is inevitable, but at least it won't impact the result of the trade.
As we said earlier, a trader must view the amount of money they are risking as an expense to see if their trade idea will work. Every trader has losses. However, consistent traders view losses as business expenses. Losses are a necessary aspect of trading, and there is no way to know which trades will win or which will lose when the trade is entered. Therefore, if we can accept the risk of each trade before placing it, these losses can more easily be viewed as part of trading rather than a personal attack from the market. Once a trader learns to accept the risk on every gold trade and concede they don't know which trades will win, it will be much easier to control one's emotions and achieve consistent results.”
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Disclaimer: spot gold trading involves substantial risks and may not be suitable to all investors. Investors who participate in spot gold trading could suffer substantial losses, and could end up loosing all or a substantial part of his/her capital.Investors should read all relevant information on this website and fully understand the risks involved in spot gold trading before making any decisions in starting spot gold trading.Note: Investing in gold bullion markets involves substantial risks. Price of gold can go up and down. Gold investors should fully understand the markets risks before starting to invest in gold. The gold price analysis and gold price forecast we provide in this site is strictly for information only. Margin gold trading is not suitable for everyone, and investors should read all relevant information before starting to invest in gold bullion markets. The investors should consider managing their own risks when engaged in gold trading. The gold trades signals, gold price forecasts and analysis cannot guarantee any profit. Investors should conduct substantial research including long term and short term gold price analysis and gold price forecast, charting analysis before making any gold trading decisions. Investors should also refer to their own gold trading platforms for real-time price of gold quotes. The comments and analysis on gold price trends we provide should be used for reference only. The gold price quotes and gold price charts provided in this website could be delayed.
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