Gold Commodities CFD Trading

Commodities are generally raw materials that are being traded in the marketplace.

These raw materials are being used to create more end-products that are to be distributed as goods.

Because commodities are being traded in the marketplace, their prices tend to swing around based on the dynamics of supply and demand; or just even changes in markets sentiment.

The continuous shifts between demand and supply imbalance make up these dynamics.

If the demand has increased, but there’s no corresponding increase in the supply (either decreased or stayed the same), then the buyers are now willing to grab some of that commodity even at higher market prices, hence driving the prices further HIGHER.

Inversely…

If the supply has increased, but there’s no corresponding increase in the demand (either decreased or stayed the same), then those who have that commodity are now willing sellers even at lower market prices, hence driving the prices further LOWER.

Commodities could be traded as spot contracts (which involve the immediate exchange upon settlement) or as future contracts (prices are to be specified for the delivery of a certain quantity at a future date).

These are being traded on exchanges (such as the Chicago Mercantile Exchange) and these exchanges are platforms for participants to trade cash for assets and vice versa.

It’s important to remember:

They follow certain rules and procedures to ensure the fairness and a systematic process for market participants to trade these contracts and other relevant products (such as CFDs, derivatives, options, etc).

Gold 101

Gold has seen its value stand throughout the ages.

And did you know?

Before paper currency came along, gold coins were the ones being used as the means of exchange.

Throughout history, societies and economies have constantly put value on gold, thus enabling it to sustain its importance.

Since its value has been accepted by many, this creates ample activity and liquidity for traders; and it is also considered by many as an investment safe haven, when price volatility in other asset classes seem to increase significantly.

Market participants could engage in the market activity by buying and selling either spot contracts.

In which…

The contract’s price represents the current price of gold in the market; or future contracts where the price of the contract reflects the price that buyers are willing to pay for on a predetermined future delivery date.

Kindly do not forget though:

Futures’ prices of commodities such as gold, silver and platinum do not assure that the future price will reach that level upon the agreed-upon schedule, but futures are used generally as a hedge – a form of risk management, or in order to speculate the likely direction of prices in the future.

Gold derivatives

Traders could also use derivative instruments of gold as means to gain profits.

These instruments are derived from the price of gold, as an individual asset.

These are also contracts, or agreements between the buyers and the sellers, and the prices are to be determined based on the underlying commodity.

Gold CFD

An example of such derivative instruments are CFDs – or Contracts for Differences. It is an agreement wherein the settlement of the opening and closing prices are settled in cash.

It is an agreement between the buyer and the seller to have the valuation difference exchanged between the price of the contract when it was opened and the ensuing contract’s price once it was closed.

These CFDs can also be beneficial to traders because they can profit from them heedless of the market’s general direction.

You can buy (or go long) if you think that the price of gold will go up, or sell (or go short) if you think that price of gold will decrease.

CFDs are interesting, aren’t they?

Trading these contracts for differences are generally easy to do. In this page are recommended brokers which can help you in that endeavor.

After you have chosen your broker and have logged onto its trading platform, you will notice that the platform has all the components necessary to aid your trading process.

Related information is likely to be placed in the same page. You could then now select Gold from the list of tradable instruments.

After which, using the broker-provided charting tool, you can study and make a decision on which direction the price would likely go to.

Next…

You may proceed to execute a trade: go long or short, which would then depend on your analysis.

You can manage the trade by taking profits along the way, or cutting losses if ever the trade goes against you one way or another.

In this page, you can find brokers which are well-known, highly reputable; and more importantly, regulated by different institutions across the globe.

They have platforms that have the best features among their peers. They also offer competitive spreads for its clients to avoid slippage.

These brokers also offer educational materials to guide you in your trading journey.

For those who prefer technical analysis, they also offer price alerts and various indicators to suit your needs.

And for those who prefer fundamental analysis, they have economic or financial calendars – listing the key dates that may prove to be catalysts for price movements.

Gold options

Options are another variation of derivatives. Gold options are financial instruments, whose prices are based on the prices of the underlying instrument, which is gold.

A contract gives the option holder the right, but not the obligation, to buy or sell the underlying asset.

If it is a call option, then it means that the holder has the right, but not the obligation, to purchase the asset at the pre-determined price.

If it is a put option, then it means that the holder has the right, but not the obligation, to sell the asset at the pre-determined price.

The pre-determined price is called the strike price. These options have an expiration date on when the holder should exercise that option.

For example:

If a speculator thinks that the price movement implies that the price of gold might tend to go up within the next 9 months, then he could purchase call options, instead of gold contracts themselves.

If ever the price movement will be adverse to his analysis, then his risk would be the price that he paid for his options contracts.

To make things more visual:

Let us say, on February 2019 trader Janet took a long call position on December 2019 gold options.

The strike price was 1360 USD. On September 2019, with the spot price being 1500 USD, Janet would like to execute her call options, by entering into a long position at a price of 1360 USD.

Janet could then wait for the expiration and accept the delivery at that pre-determined price of 1360 USD (as against whatever gold’s price will be trading then), or also choose to close her position at a gain of 140USD (1500-1360).

Her total profit would then be 140 USD multiplied how many units were in that contract that she purchased.

Gold ETF

There are also ETFs for gold, one of which is SPDR Gold Shares (GLD).

This ETF buys and holds into gold bullion.

ETFs are a way to diversify and not be directly affected by the volatility of the asset’s price.

Trading gold with leverage

Leverage is a tactic of using borrowed capital in order to increase the possible return of your investment or your trade.

We can’t emphasize enough:

Using leverage enables one to trade a larger amount of contracts even if the amount of capital is small.

Brokers have this margin feature for their clients to borrow the rest to augment one’s capital.

However…

Leverage works both ways. It could greatly increase the GAINS but it also could do the same to your LOSSES. Please do the necessary managing of your risk.

How to analyze gold trading decisions?

Let’s not forget:

Market direction, especially on the shorter term, is always dynamic.

It keeps on changing, hence trade outcomes are never guaranteed.

As buyers and sellers continuously transact with one another, these actions create a flow of varying prices.

Hence:

It is a good practice to have a process in place for the outcome is uncertain.

The guidelines on trading decisions could be generally categorized into fundamental analysis and technical analysis

Fundamental analysis discusses the fundamental reasons on what might make the prices move. It is founded on the supply and demand balances, or imbalances.

Geo-political reasons and macroeconomic factors also could be used as guidelines for your trading decisions.

For example:

If gold-producing country Australia announces a ban in gold exports, then that might cause an increase in gold’s market price as there is now a change in supply.

On the other hand:

Technical analysis is the study of past price action (and volume as well). The assumption is that the reasons that might cause price changes are already reflected in the price – even those that are not publicly announced yet.

An example is that of below:

The chart below is a weekly one. Although, the price movements in weekly charts are slower as data points take up one week before getting completed, they have lesser noise, and weekly chart users are not as prone to whipsaws, unlike their shorter-term trader counterparts.

Look:

The chart shows that although gold has been strong this year, it has topped since September.

It still is trying to establish a support zone or a range, until a catalyst could make the prices move on either direction.

Although the stochastics indicator is on the oversold level, the price is still establishing a support at the 1450 level.

If that will not hold, since the faster moving average (10 days) is below the 20-day moving average, the next support maybe found at the 1370 to 1400 level.

It is advisable to buy at support then sell some at resistance, or just trail your stops. Some momentum traders prefer to buy when the resistance is broken.

Whatever the system you employ (fundamental or technical analysis), or whatever your personal style is, it is always a good practice to think in probabilities as the future and the outcome of your trade is still uncertain.

Risk management should be heeded at all times (cutting losses, taking partial profits, etc).

How to trade gold using CFDs

After having introduced those concepts above, it is now a good time to go deeper into the exciting and challenging universe of CFD trading.

But first:

It is best that we define some terms that we are likely to encounter along the way when analyzing market action and would assist us in various trading decisions.

1. Support (Support Zone) – This is an area where there is significant demand present. The traders think that at this area, gold’s market price is low enough and they are willing to buy the shares or contracts being sold by the sellers (supply).If the market price is already at the area wherein the buyers (demand) are greater in number than the sellers (supply), then there is a good chance that the price of gold will not go lower (at least for the time being).And then this will attract more willing buyers, which will further make gold’s price rise as the demand has increased.

 

2. Resistance (Resistance zone) – This is an area where there is significant supply present. The traders think that at this area, gold’s market price is expensive enough and are unwilling to buy more at or above this price level.Then the sellers, observing that the buyers have stalled, would now be selling their shares or contracts. If the market price is already at the area wherein the sellers (supply) are greater in number than the buyers (demand), then there is a good chance that the price of gold will not go higher (at least for the time being).This action will then attract more willing sellers, which will further depress gold’s market price as the supply has increased.

 

3. Moving average – This is one of the popular indicators that are being used in technical analysis. This assists to “smoothen out” the closing prices of the commodity.It is calculated as the average of the closing prices of a given number of days. Traders who prefer the shorter-term period tend to use a moving average period of between 5 to 10 days.While those who prefer the intermediate term period tend to use a moving average period of 20 days. Essentially, if the market price stays above the moving average, then that implies that demand is present and the price might move further upward

 

4. Go Long – Or Buy. Traders who go long expect that gold’s price is likely to go further higher and they could sell at higher prices for profit.

 

5. Go Short – Or Sell. Traders who go short expect that gold’s price is likely to go further lower and they could buy what they sold at lower prices for profit.

Now that the brief introduction of terms is over and done with, let us take a closer look at this below example:

Back in June 2019, after being stuck in a trading range for the past few years, this popular yellow metal broke out of that range and proceeded to establish new highs.

Back then…

A couple of macroeconomic catalysts was that interest rates have been trending lower and the 10-year bond yields have gone up.

With that risk being seen by market participants, they proceeded to buy gold as it is generally considered to be a safe haven when the other asset classes are encountering issues.

And the result?

The demand for gold spiked up while the supply likely remained the same, hence the rise in its market price.

Let us check out a few different points in this daily chart below and analyze the subsequent market action:

Check out the difference in its price action on June 2018 as against its price action on 2019.

On June 2018 (point A), the current price then is at the support zone (wherein we earlier learned that it implies that there is substantial demand or number of buyers at that level).

And if the number of buyers is greater than the sellers, then the price will likely not go further lower, and may even rise once the price action attracted more buyers.

Here’s the point:

At point A, you see that the price is near gold’s support zone and has been increasing, you could then proceed to log-in to your favourite broker’s platform; select CFD trading and look for gold from its list of tradable assets and go long (or buy). You could close that trade later at a profit.

You could have closed that trade at point B when it reached its resistance zone and was immediately rejected. The price not only did not move further up, but instead immediately corrected.

This implied that there is a significant number of sellers at that price level to impede the price’s movement.

Not only you could have closed the previous trade at a profit, but you could also have entered another trade on your favourite broker’s platform, but this time you sold short (go short); and closed this new trade later when the price went lower.

Are you still with us?

Now let us refer to the price action on early 2019 (point C), the price is again near the support zone and has been increasing, you could have entered a buy order using the CFD instrument on your favourite broker’s platform and closed the trade around late February or early March 2019.

Now please kindly refer to point D, the price was at the resistance zone, but the difference is that it is still increasing.

This meant that the price action attracted more buyers and this enabled the price to push past that resistance zone and proceeded to look for another area where more sellers might be present.

So at point D, instead of entering a sell order CFD, because it is at the resistance zone, you instead enter a buy order CFD (go long) on your favourite broker’s platform because the price was still increasing.

You then could have closed the trade at a later date (around September 2019) at a profit.

But always keep in mind:

You should still have risk management rules in place, like closing your open trade even at a small loss, if the price action acted adversely to your initial plan.

Trading CFDs is pretty simple, don’t you agree?

As you could just select gold from the list of available tradable instruments on your favourite broker’s platform and then select buy or sell as brought about by the extensive analysis that you previously made on the direction of gold’s price.

All of these are interesting, aren’t they?

Then gear up by registering with any of these well-respected brokers and take that opportunity of learning and profiting from Gold price movements.