Gold trading is a popular investment choice for many traders. It’s a safe-haven asset that can be used to hedge against inflation and protect wealth.
In this beginner’s guide, we’ll cover what moves gold prices and which currency pairs are correlated to gold.
And, of course, the basics of gold trading in forex, including some simple calculations to explain further.
Gold trading is the practice of speculating the price of gold in the markets to make a profit. This can be done through futures, options, spot prices, equities, and exchange-traded funds (ETFs).
Physical gold bars or coins aren’t handled during the transaction. Instead, they’re settled in cash. You might decide to trade gold for some reasons, including:
1. Pure speculation,
2. Intend to buy and take ownership of the physical gold,
3. As a hedge against instability.
When trading gold, you don’t necessarily need to hold the traditional mantra of ‘buy low, sell high.’ It’s because you can go long and short on gold prices, taking advantage of markets that fall in price and those that rise.
The goal of gold trading is to predict which way the market will move. If the market moves in the direction you predicted, you’ll make more profit.
However, if the market moves against your forecast, you’ll experience higher losses.
Gold prices are influenced by supply and demand, just like other exchange-traded markets. If there is an oversupply of gold and the demand doesn’t increase accordingly, the price of gold will decrease.
Conversely, if there’s a higher demand for gold but the supply doesn’t increase, the price of gold will rise.
The first step to trading gold in forex is to open a trading account with a reputable broker. Once you’ve opened a trading account, you can start trading gold in forex.
Now, here’s where things get fascinating:
Gold Correlation Pairs
Gold is often traded against the US dollar (USD), represented by the symbol XAU/USD, and the Japanese yen (JPY), its symbol being XAU/JPY. These currency pairs are known as gold correlation pairs.
When trading gold correlation pairs, it’s important to understand the relationship between gold and the currency pair you are trading.
For example, if the USD strengthens, the price of gold may fall, and if the JPY strengthens, the price of gold may rise. (Gold and the USD share an inverse relationship with each other.)
Simple theory into practice
Let’s put the theory into practice with a simple gold trading scenario:
Scenario:
You believe gold prices will rise due to positive economic data in Europe. You decide to buy the XAU/USD pair at a current price of $1800.
Step 1:
Decide on your position size.
This depends on your risk tolerance and capital. Let’s say you choose to buy 1 micro lot (0.01 standard lot), which represents $10 per pip (pip = the smallest price movement).
Step 2:
Calculate your margin requirement.
Your broker might require a 1% margin on XAU/USD. So, the margin for your 1 micro lot position would be:
Margin = $1800 (price) X 0.01 (lot size) X 1% (margin rate) = $1.80
This means you need $1.80 in your account to open the position.
Step 3:
Track the price movement.
After a few days, the XAU/USD price rises to $1850. This is a gain of 50 pips (1850 – 1800).
Step 4:
Calculate your profit (or loss).
Your profit per pip is $10 (micro lot size). So, your total profit for the 50-pip movement is:
Profit = 50 pips X $10/pip = $500
Step 5:
Calculate your profit percentage.
Your percentage profit on the trade is:
Profit% = (Profit / Entry Price) X 100% = ($500 / $1800) X 100% = 27.78%
Remember:
This is a simplified example. Real-world trading involves additional factors like spreads, commissions, and leverage, which can impact your results.
In the upcoming blog articles, we’ll cover what spreads, commissions, and leverage are.
Negative scenario:
If the price falls, you will incur a loss calculated similarly.
Sell position:
You could also sell the XAU/USD pair if you expect gold to decline, calculating profits and losses based on price movements in the opposite direction.
Before we leave….
If you’re interested in how to gold in forex, we recommend opening a demo account to practice trading without any money.
This way will help you understand the market and develop your trading strategy. Once you’re comfortable trading gold in forex, you can open a live account and start trading with real money.
Ready to start your gold trading journey? VT Markets offers a user-friendly platform, comprehensive educational resources, and expert support to help you succeed. Open a demo account today to practice trading without risk and develop your strategies confidently. Join VT Markets and unlock your potential in gold trading. Start trading with real money when you’re ready.
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