Day Trading Gold - All You Must Know

Capital markets investors are either scalpers, swing traders, or day traders. Scalpers open and close trades within a very short period, typically a few minutes. On the other hand, swing traders use long-term trading strategies and usually close trades after weeks or even months. In between, we have the day traders, our focus today.

While many traders trade gold by taking advantage of long-term strategies, you can day trade gold. Day traders open and close trades on the same day, capitalizing on short-term price changes.

Day Trading Gold

Gold trading is speculation of the price of gold to make a profit. Gold is among the most valuable and traded commodities. It has the among the major financial assets.

You can either trade gold through options, futures, Exchange-traded funds (ETFs), or spot prices of shares. You don't have to necessarily own physical gold, the transactions are settled in cash. The plan is to buy low and sell high, allowing you to take advantage of price increases and falls. When day trading, you can make a profit regardless of the market directions.

Why do traders opt to trade gold? It all has everything to do with hedging since the metal has a negative correlation with stocks and bonds. Gold is vaunted for its stability, making it an ideal asset for storing wealth. Therefore, investors go for the commodity when the stocks are performing dismally. The demand increases volatility, making it an ideal instrument for day trading.

Factors That Move Gold Prices

Where does gold derive its value? Like other instruments, gold value is determined by forces of demand and supply. Other factors that impact the prices include:

Political and Economic Uncertainty

As mentioned, gold is considered a safe haven for investors thanks to its stability and reputation as a store of value. It is used to hedge against inflation in times of instability. For instance, investors affected by the Russia-Ukraine war would run to gold over high-risk assets.

Us Dollar Performance

The US dollar and gold are joined at the hip. The precious metal is priced in dollars. The greenback price fluctuations make gold less or more attractive to investors. If the price of the US dollar increases, gold becomes costly.

Industrial Demand

Gold is used in manufacturing electronics and jewellery. Therefore, issues that affect demand for jewellery and electronics, such as economic uncertainty, can negatively affect gold prices.

How to Day Trade Gold

There are multiple ways of day trading gold. All methods require a trading account. This means you need to choose a suitable trading broker. Once you choose a broker, here are steps on how to go about opening a gold position.

  • The first step to day trade gold is to open a trading account
  • Choose an underlying gold market
  • Perform technical and fundamental analysis
  • Open a gold position

Gold CFDs

Gold contracts for difference (CFDs) allow you to trade gold within a short time. Essentially, you buy and sell gold within a set expiration period. The profit depends on the price changes within the contract period. Trading on gold via CFDs is done with CFD brokers.

Trading CFDs is to some a rather attractive investment opportunity than trading physical gold. From a practical perspective, you can easily speculate on the price, make profits, and close the trade within the same day. You don’t have to necessarily own gold. And since CFDs products trade on margin, you can use leverage to trade higher positions that you would otherwise not afford. When using leverage, small ticks can rake in massive returns. The margin requirement varies depending on the broker and the country in which you reside, but it can be as low as 5%. With a $100 account, it would mean you could trade with the power of a $2 000 capital. However, trading with leverage is a two-edged sword and also exposes your investment to higher risks.

Additionally, you can make a profit whether the price goes up or down. Simply short gold if you think the price is on a bearish trend, or go long if the gold value is rising. You only need to do a thorough analysis and consider economic factors. Remember brokers charge fees in terms of commissions and/or spreads.

Gold Spot

Gold spot trading involves trading gold at the current market price rather than future contracts. The spot commodity market has no expiration. As a day trader, you close all contracts within the same day and make a profit based on the difference between the opening and closing prices.

Trading Gold Futures

According to Axi's, one of the common ways to day trade gold is through futures contracts which involve an agreement to trade gold at a set price on a future date. You do not necessarily have to possess the physical gold, the transaction is settled electronically only to reflect profits and losses in the trading account. Various exchanges act as intermediaries, and they include the shanghai gold exchange, US futures market COMEX and OTC London market.

A (MGC) contract represents 10 troy ounces of gold, while a standard gold future contract represents 100 troy ounces. A tick represents the least future contract movement. In gold, the least tick is $0.10. Therefore, if the precious metal moves ten ticks on a standard contract your profit loss is:

100 ounces x $0.1x 10 ticks = $100.

If you are holding two contracts, your profit or loss will be equal to $200. Therefore, to determine your profit or loss, you need to calculate the number of ticks the contract moves. Luckily, your trading platform shows you profit and loss in real-time. It is prudent to be conversant with how futures contracts work.

Gold ETFs

Trading gold ETFs is one of the simplest ways to open gold trades for daily profits. Essentially you trade through a fund that buys and holds actual gold or invests in products that track the price of gold. An example of such a fund is the SPDR Gold Trust and iShare Gold Trust. The ETF value is tied and reflects the price of gold.

ETFs have high liquidity and offer diversity when trading gold or ETFs related to gold producers. In addition, they do not expire, unlike futures. They are the most traded, with up to 17 million units traded daily.

Market Analysis

Various factors affect the price, demand, and supply of gold. For instance, economic uncertainty could boost the demand and, in turn, the price of gold. However, if a crisis affects the dollar negatively, the value will tumble. Other factors that affect the price include:

  • Market volatility
  • Supply and demand
  • Geopolitics

You, therefore, need a holistic view of the market to determine the price direction. This is where fundamental and technical analysis come in.

Fundamental Analysis

As a day trader, you should be well versed with factors that can affect the price of gold. Major factors include the federal reserve raising the interest rates, bonds and stocks market returns, and monetary and fiscal decisions. You should therefore have your ear in the ground to catch any news event. For instance, central banks announcements can cause the price of the yellow metal to move hundreds of pips in a few minutes.

Technical Analysis

In trading, the rule of the thumb is the market is your friend. To identify the trend, you need technical analysis tools. Some of the most helpful tools include trendlines, ATR, MACD, and relative strength index (RSI). Remember, an uptrend is formed by higher highs and highs lows. Similarly, a downtrend is formed when connected bottoms and the tops form a slanting structure downwards. However, you need to use various technical tools to confirm and establish confluence. A good analysis gives you better trades which you can enter more confidently.

Premium Tips to Successfully Day Trade Gold

  • When day trading, liquidity, and volatility are your friends. Gold volatility increases massively, especially during the London and New York markets.
  • Always take the trade in the direction of the trend. For instance, during an uptrend, wait for the market to make a swing high and pull back. Enter the market after the consolidation as it resumes the uptrend.
  • The legal requirement to start trading gold in the US is a minimum of $25000.
  • The best time to trade gold is between 10 am and 6 pm EST when the market is very active.
  • Meticulous analysis, a good market news stream, and a proper understanding of market sentiments are requisite to open winning positions.
  • Understand the risks involved before you start trading.

Final Word on day trading gold

Day trading gold can be profitable. However, you require a thorough understanding of how the gold market moves. In addition, you should keep abreast with news events that affect gold. Lastly, do a thorough analysis to establish the market trend.

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