Gold is one of the most volatile trading instruments in the forex market. It is represented as XAU and is frequently paired against the United States Dollar. The asset is popular amongst traders as one of the most volatile and liquid instruments. Many strategies in currency trading are developed exclusively for trading XAUUSD, and the participants who trade the metal classify themselves as gold traders.
Characteristics of Gold
Learning about gold trade one would discover that it has many characteristics that traders should note before placing their positions.
Pip
On XAUUSD, each pip or ten points are equivalent to 10 dollars change in equity for a standard lot. For a four-digit broker, a ten pip movement will be a change in the price of the metal from 1800.00 to, let us say, 1801.00. Since gold can move pretty quickly, you can see huge fluctuations in your equity in a short time.
Volatility
As mentioned before, gold is one of the most volatile instruments, with an average daily pip range that can go up to 500. As the price movement is high, it is possible to make quick bucks with the precious metal. Traders sometimes decrease their lot size to cope with their risk management.
Spreads and Commissions
The spreads on XAUUSD are generally higher than other instruments. Nowadays, the volume is becoming better and more brokers are offering to trade the instrument at a low cost.
Factors Influencing Gold
Few factors can influence the movements of gold that may include supply, demand, inflation, and deflation. Some psychological factors such as greed and fear may also play a part. It is also important to look out for the fundamentals that the metal is paired with. For, e.g., on XAUUSD, it is vital to be wary of the Non-farm payroll, interest rates, and FOMC meetings.
Methods to Trade Gold
Gold is available to trade through several routes.
- Metal. Market participants can buy some amount of gold and sell at a higher price
- Futures. The futures market is one of the major ways to trade gold. Through a future contract, a trader agrees to buy/sell an instrument on a future date. Such types of the contract take place on regulated exchanges
- Stocks and ETFs. One way to invest in the precious metal is to buy or short the shares of gold mining companies. There is a directly proportional relationship between these companies and the price of the metal. Exchange Traded Funds are also a common way to trade gold. Through CFD brokers, you can easily place a buy or sell execution. While you may not own the asset, speculation on prices will give you profit or losses.
A Few Strategies to Trade Gold
There are many fundamental and technical strategies used to trade gold. Traders use various economic reports for the currency the metal is paired with and couple them with the supply and demand of the gold to make future predictions. E.g., gold can act as a safe haven currency when the other currencies are in turmoil. This can lead to rapid buying of the precious and thus hike the price.
Technical traders draw various trend lines, supply/demand zones, Fibonacci intervals, identify market structure, etc., to trade gold. They can correlate the price action from higher time frames and take an entry after receiving a good confluence. Scalpers are seen searching for opportunities on the M1 or M5 chart while day traders are at H1 or H4.
A Few Benefits of Gold Trading
There are several benefits to trading gold. Some of them are listed below:
- For traders who love volatile markets, gold is the asset to trade. The precious metal also has a good volume which traders can use to get quick fills
- The precious metal can be traded in several forms
- Traders can invest in gold mining companies to diversify their portfolios even further