The gold market offers high liquidity, which offers the opportunity for profit. Some people choose to own the metal, holding it physically, but traders prefer not to have to hold the metal in their possession. Gold price fluctuations can offer plenty of advantages for those who have learned the unique characteristics of the global gold market. Trading gold requires a unique skill set and while it is not difficult to learn how to trade gold, those who are new to gold trading must take it slowly. Here we will look at a few steps that are important in learning how to trade gold.
- Understand what moves gold. Gold reacts to a few specific catalysts, including inflation and deflation; greed and fear; and supply and demand. These forces are always in play with combinations of them acting together around the world. It is important not to assume that one force is moving the market when it fact it is a different force that is in play.
- Understand the crowds and their interests. Many different types of crowds with different interests are attracted to gold. Collectors, or gold bugs, amass amounts of physical gold, focusing the family assets on the yellow metal. These are long-term players who rarely sell, but provide a continuous supply of buying interest, providing significant liquidity. Institutions often provide hedging as they buy and sell in combination with currencies and bonds. These risk-on, risk-off strategies are particularly popular in highly conflicted markets where there is lower than typical public participation.
- Understand the long-term gold chart. Look at the long-term history of the gold chart, going back at least 100 years to find trends that lasted for decades. This will highlight price levels that should be watched when gold returns to those levels. Gold showed little price movement until the 1970s when there was a long uptrend due to increasing inflation from rising crude oil prices. In the 1980s, a restrictive Federal Reserve monetary policy caused a downtrend that lasted a decade. An uptrend followed until 2011 when it started to decline once again.
- Choose a venue. Gold trends affect liquidity with liquidity increasing during sharp movements and liquidity decreasing during quiet periods. This affects the futures markets. You must choose your venue for risk taking, with a focus on high liquidity and how easy trade executions are.
- Get started with a free demo account. Gold trading is different to other trading and no-one should jump in without doing their homework. It is always a good idea to begin with a demo account where you can trade to get a feel for price fluctuations and which will allow you to trade in real time and see the results. It is recommended to trade in a free demo account for at least two to three months before trading for real. Getting a feel for correlations will make you a more successful trader and the free demo account will give you as much time as you need to practice.
