A very experienced young trader once told me that when you have successfully traded metals, you have graduated to the next level of trading. Discounting the inherent arrogance of a brash Wall Street know it all, there is some truth to this. Gold (XAU) and Silver (XAU)-the two most common vehicles for currency traders-have distinct characteristics that make them a greater challenge for many retail traders. For one thing, it generally costs more to trade them in terms of spread and leverage. Trader’s accounts can be affected to a much greater degree for traders of these instruments.
Gold and especially silver, are quite volatile, and average daily trading ranges measured in pips, is generally much larger than currencies, even against some of the high flying exotics. The risks are greater, but so are the rewards, though traders just beginning to trade metals should move cautiously. Very easy to wipe out an account. Risk management is the key to trading metals. Hera are a few other ideas, and some trading tips to consider:
Trends can last a very long time. Gold and silver can work quite well for scalpers, intraday as well as swing traders. Average daily ranges on gold can be $10-30 USD during quite periods, and $40-$60 during more volatile ones such as the second quarter of 2013. That’s a lot of pips! Before both gold and silver reversed direction in 2012, both had more than a decade of continuous growth. Indeed, many believe that the downward move-which continued through the second quarter of 2013-is merely a long needed and obvious correction, and both gold and silver will continue their longer term trend higher over the next couple of years. Who’s to say? Both commodities have huge demand curves, especially in the retail market where buyers in emerging market economies like China and India continue to buy more (even when governments impose restrictions), especially when prices dip. The demand for physical gold seems to be growing as well. Central banks have also been net buyers, perhaps in anticipation of future currency depreciations. While the U.S. Federal Reserve’s QE program, and easing by other central banks was expected to unleash a huge wave of inflation, it has not done so...yet, even with stratospheric national debt levels. The point here is that current trends may be intact over the longer period and traders need to adjust their trading methods to accommodate this fact. Many traders welcome a break from straight line price action, and are content to trade the range, which for both gold and silver, has expanded over the last twelve months.
Trade light. This is really the critical attribute of successful and profitable trading. With gold, and especially silver, it is better to go lighter than one would normally go with other currency pairs. Price action in these commodities can make for incredible gains, but accounts can suffer unrecoverable damage when not employing strict money management. The challenge with trading both gold and silver, is that setting stops-a necessary measure-is often the art of the impossible, as the wide ranges can force traders into “uncompromising” positions. The support and resistance levels also tend to be rather obvious, and are not good places for traders to “hide” their stop loss intentions. Better to compromise with your lot size and go lighter on each trade. The advantage of smaller size is that you can still get quite a “bang for your buck” in comparison with trading some of the major currency pairs like the EUR/USD or GBP/USD...and do so with less risk. Breakouts in gold and silver seem to happen on a more frequent basis, and traders of these metals can see higher percentage gains in shorter periods. Caveat Emptor all the way!
Watch the U.S. Dollar. Although commodities can trade against other currencies, it is the USD that’s the key currency of both trade and pricing, and the one to watch to gauge setups for gold and silver. When the dollar is strong-or when economic conditions suggest the USD will move higher, gold and silver tend to move in the opposite direction. This is not always the case, though generally, policies and events that might help the U.S. economy, minimize instability, curb inflation and portend economic growth, lessen the appeal of gold in particular. Many gold and silver traders will follow the U.S. dollar index as well as the flows in and out of Exchange Traded Funds (ETFs) for clues.
Be ready for surprises. Liquidity is tremendous in the commodities markets, and sharp volatility-often without warning or apparent reason-is the hallmark of trading gold and silver. The art of trading gold and silver includes the ability to set take profit limits that match trading goals, as well as timing of market ranges. Day traders are best to think of $10-25 moves in the price of gold when setting both limits and stop losses. For silver traders, a $1 daily move is huge and historically, moves are less than that. However, as with all things, the present and future may not match what happened in the past, but is a good guide to use until conditions change.
Keep and eye on mining stocks. Although central bank buying, interest rates and especially inflation levels are key to determining potential price action, so are the shares of mining stocks. Countries that mine gold and silver (think Canada, Australia, Russia, South Africa and a few others) and related private and public companies, are often good indicators of the direction of price action for the metals. So can currencies such as the AUD. Indeed, some traders will use the mining info to place bets on the commodities, the currencies, and the equities. When mining stocks decline, it is often a sign that demand in the retail sector is expected to diminish, or economic growth has stalled. Silver is especially sensitive to demand as it is used in the manufacturing process of many products in a wide variety of industries, while gold is more closely related to currencies and overall economic activity. Both are considered hedges against inflation, though that role is often disputed. Tracking mining stocks can help traders determine positive or negative fundamentals. A good example was in 2013 when several gold mining stocks declined sharply BEFORE paper gold on the markets experienced another big selloff. Another factor some traders now consider is when the price of a commodity moves close or below the cost of mining it. Often, this is used as a signal that the price will reverse.