Trading gold online in the Forex market is an excellent way to take advantage of movements in the price of gold. Moreover, it’s fairly easy to learn how to trade gold online in the Forex market – especially if you already trade Forex.
How Gold is Traded Online in the Forex Market
In Forex trading, a trader will simultaneous buy of one currency (a long position) and sell another (a short position) with Forex prices being quoted in pairs. However and to trade gold in the Forex market, a trader will simply take a long or short position in gold at the same time that he or she takes the opposite position in the US dollar.
Hence, reading a spot gold quote (XAU/USD) will just be like reading a Forex quote with the first symbol representing one “troy” ounce of gold. Therefore, US$1,000 XAU/USD will mean that one ounce of gold is equal to US$1,000 US dollars with the dollar amount fluctuating.
In addition and just like in the Forex market, the price at which buyers are willing to buy spot gold is called the ask price and price at which a seller is willing to sell spot gold is called the bid price with the difference known as the spread. Since spot gold trading is fast pace, these prices can change fairly quickly in a fast moving market.
Gold Trading Example
When trading gold, a spot gold trader may receive a quote for spot gold that looks like 1,000 / 1,001 meaning one could sell spot gold at US$1,000 or buy it at US$1,001. Hence, a trader could buy a single lot of gold equaling 10 ounces at US$1,000 per ounce or for US$10,000 total. If the price of gold rises to US$1,005 per ounce or US$10,050, the trader will make US$50. If the price of gold falls to US$995 or US$9,950, the trader will loose US$50.
A trader can also use leverage to significantly increase the amount of gold he or she buys. However, the use of leverage in gold trading, as with any other trading, can significantly increase returns but it can also significantly increase the amount of risk faced by a trader.
Trading gold online in the Forex market is easy to learn and resembles the way Forex itself is traded. However, trading gold online in the Forex market also comes with its share of risks as well as rewards that a potential trader should thoroughly understand and know about before he or she begins trading.
Important Trading Tips for Any New Online Gold Trader
When trading gold, there are a few important tips to keep in mind that will help you make better trading decisions.
Important Gold Trading Tips
For starters, gold trading is often compared to Forex trading as its more like trading a currency than a commodity. Gold is traded around the world against the major currencies and is affected by global supply and demand as with any other commodity. Hence, money is made or lost off of dramatic gold price swings and not so much by the value of gold itself.
Moreover, gold tends to be worth trading in times of inflation or currency devaluation as it is viewed as a store of value. However, gold has also risen in value during periods of deflation or disinflation as well – especially during multi-year boom and bust credit cycles. Hence, the value of gold is often determined or influenced by the level of uncertainty over the direction the economy is heading in. In other words, investors will tend to hoard gold when there is an economic or some other type of crisis and the price of gold will rise.
On the other hand and during periods of relative economic calm and stability, a trader may still make money by trading in gold futures or options as well as in gold itself.
Gold Prices Verses the US Dollar
Given the nature of gold trading and how spot gold prices are quoted, gold traders are essentially selling the US dollar when they buy a spot gold contract and are buying the US dollar when they sell a spot gold contract. Hence, gold prices will typically rise when the US dollar falls and fall when the US dollar rises.
Keeping the above tips in mind will help a gold trader make better and more informed trading decisions when they begin to trade gold.