The world of online trading can seem more than a little daunting to the uninitiated but when it comes to Gold, everyone knows what they’re dealing with right? So how does this shiny, precious metal make you money when trading online and what do you need to know about trading gold in forex?
How To Trade Gold In Forex? Trading gold is very similar to trading foreign exchange as gold is electronically traded using forex brokers in the same way as you would trade standard currency pairs. At Trade Room Plus, we recommend trading gold on spread bet and CFD markets via Markets.com and believe that the best trading strategy for gold is support and resistance.
As experienced and trusted online trading educators, the team here at Trade Room Plus helps new online traders learn, understand and execute the best trading strategies based on their goals.
If you’re brand new to trading or are considering trading gold in forex for the first time, read on for an overview of everything you need to know, starting with the basics of “What is Gold?” and “What is Forex? Before we look into the specific strategies needed to trade gold successfully in more detail.
The GoldTrade
Gold is a naturally formed metal with origins of human interest dating back to 3400 BCE and the Egyptians. It’s fair to say it’s quite simply one of the most precious metals in the world! It’s shiny, has prestige, is a symbol of wealth, beauty and power, and is the subject of many bank heists in the movies. We’re all used to seeing gold jewellery and gold blocks in safes, but if you’re reading this you will be more interested in it’s offering as an excellent online trading currency.
What Is Forex?
The foreign exchange market, commonly referred to as ‘forex’, is one of the world’s most traded marketplaces with over $5.1 trillion of currency changing hands every day. The market is open 24 hours a day, 5 days a week to banks, institutions and individual traders worldwide. Unlike other financial markets, there is no centralized marketplace for forex, currencies trade in whatever market is open at any given time.
Forex trading starts each day with the opening of the Australasia area, followed by Europe, and then North America. As one region’s markets close another opens, or has already opened, and continues to trade in the forex market. These markets will often overlap for a few hours, providing some of the most active periods of forex trading.
Forex works by trading one currency for another with the intention of making a profit by actively speculating the direction the currency is likely to take in the future. Currency trades are split into major and minor pairings with most major pairings (shown in the table below) featuring the US Dollar . Major pairs make up 80% of all Forex trades whilst Minor pairings refer to all other combinations of major markets including EUR/GBP, EUR/CHF and GBP/JPY.
Popular currencies to trade include
|
COUNTRY |
SYMBOL |
COUNTRY |
SYMBOL |
|
United States |
USD |
Switzerland |
CHF |
|
Eurozone |
EUR |
Canada |
CAD |
|
Japan |
JPY |
Australia |
AUD |
|
Great Britain |
GBP |
New Zealand |
NZD |
Table Source: Forex.com
Major Currency Pairs
|
DESCRIPTION |
SYMBOL |
KNOWN AS |
|
Euro/U.S Dollar |
EUR/USD |
Euro |
|
Great British Pound/US Dollar |
GBP/USE |
Cable |
|
US Dollar / Japanese Yen |
USD/JPY |
Yen |
|
US Dollar/Canadian Dollar |
USD/CAD |
Loonie |
|
US Dollar/Swiss Franc |
USD/CHF |
Swissy |
|
Australian Dollar/US Dollar |
AUD/USD |
Aussie |
|
New Zealand/US Dollar |
NZD/USD |
Kiwi |
Table Source: Forex.com
How Does Gold Fit Into Forex?
Unlike the FX pairs illustrated above which all have two central banks, Gold is a forex market that only has a central bank on one side. Effectively gold is GOLD/USD and the only central bank is the US FED.
It is generally believed that gold is inversely correlated with stock markets. If the stock markets go down, the price of gold goes up, and if stock markets gain in value, the price of gold goes down but this is not necessarily true as shown by the chart below. The chart shows the price of gold and the price of the largest stock market index, the S&P 500. Here there are clear periods in the last year where gold price has risen and fallen at the same time the S&P 500.
INSERT CHART FROM TRP that shows the true lack of correlation.
This means that traders should not be sucked into only using overly simplistic index market rises and falls to inform their gold market trades. Traders should always take the time to research the gold market as thoroughly as possible, analyse it’s quirks, historical trends and build a trading strategy that has been tested and works for you. We cover other key indicators for the price of gold later in this article too.
It’s likely that tracking the US Dollar will form a part of your trading strategy, but it shouldn’t be your sole focus when looking to trade Gold successfully. You can keep up to date with USD fluctuations and gold levels with this or other gold market data page and Trade Room Plus has lots of tools and education resources available to help you take the best approach for building Gold trading strategies that work.
Why Trade Gold?
For some people, trading gold is attractive simply because the underlying asset is physical rather than a number in a bank account and gold also has a reputation as a ‘safe haven’.
This means that in times of market uncertainty, investors turn to gold due to its ability to maintain, and often increase its value during periods of volatility. This was illustrated clearly in the 2020 global Covid-19 pandemic where interest rates crashed around the world to next to nothing but the price of gold rocketed to its highest ever level.
Traders tend to sell safe haven assets when their appetite for risk grows, switching to stocks and other currencies with a higher interest rate. This means that Gold is an important hedge against inflation and is a very valuable asset to have in your investment portfolio.
In August 2020, the price of Gold reached a record high of $2,047 (£1,538) per ounce. This is nearly double its value compared to the previous five years and in an indication that investors are being cautious with their investments as they fear a second wave of the pandemic, rising geopolitical tensions and the weakening of the US dollar.
Gold Price By Year
How To Trade Gold In Forex
So, we’ve covered gold’s history, what forex is and why gold is traded but what do you need to know about trading gold and how do you go about it? Read on for more detail on what strategies are best when trading gold, what affects the price of gold, and top tips for gold trading beginners.
What Strategies Should You Use To Trade Gold?
As with any trading instrument, there is no single “best” way to trade gold but here at Trade Room Plus, based on our experience, we recommend trading gold on spread bet and CFD markets via Markets.com and believe that the best trading strategy for gold is support and resistance.
As with all trades, you simply have to buy or sell depending on whether you think that the gold price is likely to rise or fall. To help you spot these trends and execute timely and profitable trades when it comes to trading gold in forex, you will need to understand the following points:
- Spread bets
- CFDs
- Support & Resistance
- Fundamental, sentiment & technical analysis
What Is A Spread Bet?
A spread bet is a tax-free financial derivative that enables you to speculate on a huge range of financial markets, such as forex, indices, commodities, shares and bonds without taking ownership of the underlying asset. The advantage of spread bets is that you are trading in both directions giving you more opportunities when making key trading decisions.
Spread bets are based on three elements, the spread, the bet size and the bet duration. The spread is what you pay to open your position, the best size indicates how much capital you put up and the bet duration determines how long you will keep your position open before it expires.
Source: Ig.com
What Does CFD Mean?
CFD stands for ‘contract for difference’ and is a financial derivative. This simply means that you can speculate and trade on rising or falling prices without taking ownership of the underlying asset. Traders using CFDs choose to buy, sell or hold based on whether they think an asset will rise or fall in price and it is common to use CFDs to trade in a wide range of markets including shares, forex, indices and commodities.
What Is Support & Resistance?
Support & Resistance is a popular trading strategy and one that we use regularly at Trade Room Plus. The term simply refers to two different levels on a price chart that indicate a limit in the market’s range of movement that can be used to underpin where and when they take a trade.
● The support level is where the price regularly stops falling and bounces back up. It is indicated by price levels that typically connect horizontal price bar lows to other price bar lows.
● The resistance level is where the price stops rising and dips back down. It is indicated by a horizontal connection to multiple price bar highs.
These two change points are called swing points and we generally see that market price respects the support and resistance levels. Price movement is contained until price breaks through either of the level barriers.
Supply & Demand
Supply and demand is also important when using support and resistance strategies because if there are more buyers than sellers then the price could rise and if there are more sellers than buyers, prices tend to fall.
What does supply and demand look like on a chart? Supply is an area on a chart where sellers are likely going to overwhelm buyers causing the stop to go down. On a chart, we call this resistance. Demand is an area on the chart where buyers are likely going to overwhelm sellers causing the stock to go up. On a chart we call this support. This means that in general it therefore makes sense to buy at support and sell at resistance.
At Trade Room Plus we primarily plot key support and resistance from swing points on the daily timeframe and the one-hour timeframe and don’t generally consider support and resistance levels that show themselves on shorter time frames only.
Find out more: Understanding support and resistance in trading
Fundamental, Sentiment & Technical Analysis
The best gold trading strategy will incorporate some components of fundamental, sentiment, and technical analysis. A gold trading tip we offer is that fundamental and sentiment analysis can help you spot trends, but a study of the gold price chart and patterns can help you enter and exit specific trades.
Fundamental Analysis
Fundamental analysis is used to evaluate the intrinsic value of gold to establish if you think it is undervalued or overvalued and therefore how it is likely to move. Traders adopt fundamental analysis by studying everything from the overall economy and industry conditions, to the financial condition and management of companies. Earnings, expenses, assets, and liabilities are all important characteristics to fundamental analysts.
Technical Analysis
Technical analysis is when traders review historical trends and recent behaviour in gold price and volume in order to predict future price movement and market sentiment. This is based on the assumption that market movements are ultimately determined by supply, demand and mass market psychology meaning individual prices of securities don’t need to be studied specifically.
Sentiment Analysis
Sentiment analysis takes a more qualitative approach to reading the general appetite for risk amongst traders in the market. If traders are moving their money to safe havens like gold, then the appetite for risk is low. If however high risk currency trades are booming then the appetite for risk is higher.
What Else Do I Need To Know When Trading Gold?
Gold is an excellent way to diversify your investment portfolio. As it’s value doesn’t move in line with other assets such as equities or property it provides a great reliable insurance policy for your money, This means that every investor should consider investing in gold in order to have a diverse investment strategy that spreads their risk.
Whether you’re trading gold on spread bets or CFDs, then you need to be aware of and understand; ‘going short or long’, ‘leverage’ and ‘margin’. We cover these points briefly below and go into more detail here in this Spreadbet vs CDFs .
What Is Margin?
In the forex market, margin is the amount of money that you must deposit and keep on hand with your trading platform when you open a position. Unlike trading securities, it is not a down payment and you do not own the underlying currency pair.
Margin is a proportion of your account balance that you have set aside to allow you to trade and involves placing a good faith deposit to open and maintain a position in one or more trades. The amount of margin is usually a percentage of the size of the forex positions and will vary by forex broker but in Forex marketing 1% margin is not unusual, which means that traders can control $100,000 of currency with $1,000.
What Is Leverage?
Leverage is expressed as a ratio that represents the amount of money you have and the amount of money you can trade. For example, if you wanted to trade 1 standard lot of USD/JPY without margin, you would need $100,000 in your account. With a margin requirement of just 1%, you would only have to deposit $1,000 in your account and the leverage provided for this trade would be 100:1.
In summary, leverage is the increased ‘trading power’ that becomes available when using a margin account so you can say that margin is used to create leverage. Source: babypips.com & Investopedia.com
What Does Going Long Mean?
When trading in Gold in Forex, going long means to buy gold with the expectation it will rise in value. Traders going long will profit when gold prices rise.
What Does Going Short Mean?
When trading in Gold in Forex, going short means to buy gold with the expectation it will fall in value. Traders going short will profit when gold prices fall.
Because every currency trade involves a pair as covered at the beginning of this article, you are in effect going long on one currency and short on another when trading gold in forex. For example, when going long with a gold trade, you are betting that gold will be worth more than the USD in the future.
When putting this into the context of traditional currency pairings it will look like this: If you go long on EUR/USD for example, you are buying EUR with USD so you are long on EUR and short on USD. If you sell, or go short, EUR/USD, then you are long USD and short EUR.
Related Questions
When Should I Invest In Gold?
As with all investments, you should only invest in gold if you have cash to invest and can afford to lose it. Despite it’s safe haven reputation, any type of investment is a risk. So you should always be aware that you may get back less than you put in or lose all of your money all together, no matter how safe your investment vehicle appears from the outside.
Other Factors To Consider When Deciding To Invest In Gold Are:
– Do you know what you’re doing when it comes to online trading?
– Do you know enough about the unique characteristics of world gold markets or the hidden pitfalls that can rob profits?
– Do you have an investment / trading strategy?
– How much time do you have to manage your investment?
– Why are you investing in gold? Is it to get the most from your cash or because you’re trying to make a quick buck? Knowing why you want to invest is crucial to investing in the right places.
If you need help understanding any of these points in more detail, the team at Trade Room Plus can help!
What Affects The Price Of Gold?
Gold is one of the oldest currencies on the planet and is deeply embedded in the financial world but what are the key factors affecting whether it’s price shoots up or down? Like all derivatives, market liquidity and global relations will pay a big part in overall market performance but you should also pay attention to the following specific price catalysts when trading Gold:
Price catalysts for gold include:
- Central Bank Reserves:
- Value Of The US Dollar
- Demand For Gold Jewellery
- Economic Data
- Supply & Demand
- Gold Production
Central Banks
Central banks hold paper currencies and gold in reserve. When central banks move their reserves away from paper currencies and into gold, the price of gold typically rises. According to Bloomberg, governments brought a total of 651 tonnes of gold in 2018!
Economic Data
Economic data, such as jobs reports, wage data, manufacturing data, and broader-based data such as GDP growth, influence the Federal Reserve’s monetary policy decisions, which can in turn affect gold prices.
Demand For Gold Jewellery
According to the World Gold Council, in 2019 Jewellery accounted for around half of total gold demand. Gold can be used for jewellery, electronics, technology and industrial uses where it can be used to manufacture things like medical devices and GPS units for example. This leads us onto the effect of supply and demand. As the demand for these types of consumer goods rises then the cost of gold can rise too.
Supply & Demand
Supply and demand is a big factor in any market. Increased demand of an asset in short supply will push it’s price up and less demand for a product with plenty of supply will lead to a drop in price. Due to its reputation as an investment safe haven, gold is likely to see a surge in demand when investors are feeling cautious or are reacting to economic uncertainty.
Inflation
Inflation is another factor that can impact gold prices. When the cost of goods and services rises, the price of gold tends to rise too as inflation is almost always a sign of economic growth and expansion. In contract, lower levels of inflation bring down the price of gold.
Gold Production
China, South Africa, The USA, Australia, Russia and Peru are some of the world’s biggest gold mining communities. If the amount of gold that is mined exceeds demand then the price will go down. As gold mining continues, the easy to reach, ‘low hanging fruit’ has been harvested already so mining becomes harder and takes longer, which costs more money.
It’s points like the above that those investing in gold should pay close attention to when learning about the ins and outs of their investments and the impact it has on the eventual price of gold.
Read more about all of these factors here: What Affects The Price Of Gold
I Want To Start Trading Gold, Where Should I Start?
Before you start trading anything, you need to learn how to trade with the help of experienced traders who have been there, done that, and can prove they know what they’re talking about! Then you need to build a trading strategy and put your strategy to the test in a safe trading simulation environment before you even consider risking real cash.
You will also need to be prepared to:
● Be realistic and learn how to handle loss
● Learn trades that work for you based on your appetite for risk, how much time you have and
● Invest the money you have available
● Know the markets you operate in
● Know what you can and can’t control in trading
● Learn your trading psychology
● Find a good teacher to show you the ropes
Find out more:
● How to build a trading strategy
● Trading Strategies link when live
Summary
Whether you’re brand new to online trading or have been trading for a while but want to begin trading gold for the first time, then we hope this article has given you an overview of the key things to consider when trading gold in forex.
Always remember that anyone can trade in any market they want to as long as you have a solid trading strategy, know what you are doing and are always prepared to lose money.
How To Trade gold In forex? Today, trading gold is very similar to trading foreign exchange or FOREX as Gold is electronically traded using forex brokers in the same way as you would trade standard currency pairs. At Trade Room Plus, we recommend trading gold on spread bet and CFD markets via Markets.com and believe that the best trading strategy for gold is support and resistance.