Five Common Gold Trading Mistakes When Using Leverage

Here are some of the top gold trading mistakes. One gold futures contract on the Chicago Mercantile Exchange (CME) equals 100 Troy ounces. Gold has been trading around $1700/ounce recently, making one contract worth $170,000. In order to buy or sell one contract, the investor must have a large enough margin in the trading account. The CME determines this margin and futures brokers can set their own margins higher if they desire. Recently, the CME margin was raised from $4500 per contract to $5500. So, for a margin deposit of $5500, an investor can control $170,000 of gold if gold is priced at $1700/ounce. This margin level is referred to as the maintenance or overnight requirement. Brokers will offer much lower margin levels to day traders, often as low as $500 per contract.

 

The minimum price change in the value of gold per ounce is called a tick, which is equal to $10. A gold trader who purchases a gold contract for $1700/ounces will make a profit of $1000 if the price of gold rises to $1710/ounce, but lose the same amount if gold declines to $1690/ounce. Failing to understand the effect of leverage is the most common and biggest gold trading mistakes traders make. It is imperative to practice with simulated funds until the concept of leverage and its effect on the trading account are second nature and automatic.

 

A second common mistake is the complete and total lack of a trading plan. A trader should take whatever length of time is necessary to develop and test trading plans that have a reasonable expectation of producing positive results. This plan should lay out rules for trade entry, management and trade exit, as well as specify what action the trader will take regardless of how a trade unfolds.

 

Using leverage incorrectly is the third most common mistake, specifically, using too much. To avoid this issue, proper account sizing is required. This simply means to determine the balance between returns and risk, with the goal being to limit drawdowns of trading equity to a low enough percentage where any losses will not dictate that all trading activity must cease.

 

The fourth common mistake leverage can create is a lack of trading discipline on the part of the trader. It is not the fear of losing money so much, but the fear of being wrong that compels many traders to refuse to give up a losing trade while that loss is a small one. The other side of this issue is the greed factor that prevents the trader from booking a healthy profit, only to watch that profit evaporate while hoping for an even bigger winner.

 

Finally, many gold trading beginners and experts alike fail to understand their goals and psychological temperament adequately. Thoroughly knowing your reasons for trading and the trading style that best suits your psyche is the first and most important step to avoid trading with strategies and tactics that are adverse to your personality.

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