5 Tips to improve your Gold Trading strategies
Gold trading is one of the most complex commodities in the market today due to its uniqueness compared to other commodities. For instance, crude oil is used to power engines while copper is used in wiring and other purposes. Tea and coffee are consumed by billions of people every day. On the other hand, gold is used for basic purposes such as ornament making.
However, gold is a very important commodity in the world today because most countries use it as a currency reserve. Trading in gold therefore can help your portfolio in a number of ways.
This article highlights five key tips you need to follow to make profitable gold trades.
1 - Read about Gold
The first thing you need to do is to read about gold (here a selection of day trading books). You should read about the various aspects of gold such as its history, the main exporters and importers of gold, and its use. You should also read how gold relates to other asset classes such as bonds, currencies, and stocks.
There are many books on gold investing that you can read. Some of the best books on gold are: Barry Eichengreen's Golden Fetters, Peter Bernstein's The Power of Gold, and James Rickards’ The death of money.
These books will give you the fundamental information you need to understand gold and how it works.
⇒ 4 gold characteristics you should know
2 - Relationships
In reading about gold trading, you should carefully identify the relationships between gold and other asset classes. Gold relates in a certain way between the major asset classes. For instance, gold tends to go up during the periods of high uncertainties. It also tends to go up when the dollar weakens and when the US market is going down.
The logic behind this is simple: as the market goes up, investors try to find opportunities to make money in the stock. They mobilize their resources from gold to buy stocks. In addition, when the dollar is losing its value, investors will buy gold as a way of mitigating risks.
Therefore, you should take time to understand these relationships and how they work.
3 - Develop a Strategy
After learning and understanding how gold trading works, you should now take time to develop a strategy. This should guide you on when to buy, hold, or short gold. Also, the strategy can either be technical or fundamental. You can also combine the two analysis methods to create a trading strategy.
The strategy can be manual or automatic. In a manual trading strategy, you will take time to look at your charts until a time when your parameters are met. You will then open a trade when all the parameters are met.
An automatic strategy is one where algorithms execute the trades when the parameters are met. You should always back-test the strategies to ensure that its accurate.
⇒ 4 timeless strategy you should know
4 - Back-Test the Strategy
After developing the strategy, you should now back-test it to ensure that it’s accurate. While no strategy is 100% accurate or risk-free, your strategy should have a high accuracy level. In this, you should do the best you can to create various models and backtest the tool with it.
This process should take a period of between a month or two. Also, you should use only a few tools to create the system. The more tools you use, the tougher it will be for you to become successful.
5 - Be in the Know
As a gold trader, you should always have the latest information with you (this could be a part of point #1). In this, you should always have the latest news and information as soon as it breaks.
A few tools that might help you with this are: Bloomberg (TV, Twitter, and their website), Wall Street Journal, CNBC, and StockTwits among others. You should adjust your trades as soon as a news relating to gold breaks.