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Published On: Tue, Jan 8th, 2013

How to Trade Gold Successfully

If you have a preference to trade gold and desire to do so successfully, then essentially you must develop your trading mindset so that you can implement quality decisions over a considerable period of time. The importance of mastering this skill cannot be understated. This is because you will need to react in a professional manner to the many involved conditions that the gold trading environment is capable of generating.

Under such circumstances, you will not possess the luxury of allowing your hunches and gut feelings to influence the process of your trading decision-making at all. Instead, you will need to remain focused at all times without allowing yourself to become distracted by any internal or external stimuli, no matter how enticing. Expert consensus explicitly stresses that trading gold successfully requires a business-type and professional approach.

As such, your primary objective must be to ensure that your account balance is fully protected from the high levels of volatility that gold trading can create. By doing so, you will then minimize your stress levels which will enable you to trade in an objective manner. In particular, you must take steps to safeguard your equity from margin calls. These traumatic events occur when you overtrade and subject your account balance to excessive levels of risk. In the worst cases, your account balance could plunge to zero enforcing your broker to issue a margin call. Under such circumstances, you will then witness the automatic closure of all your active positions. This is a very daunting prospect and must be avoided at all costs.

gold

An example of such a deployable trading experience is illustrated in the next diagram. Envisage that your equity equals $5,200 and you have just instigated a new gold position at $1,816.00 per oz trading at $2 per pip using the XAU/USD currency pair. You adopt a gung-ho approach and decide not to activate a protective stop-loss. Unfortunately, price rapidly moves against your trade, as displayed on the chart below, to the point that it eventually hits $1,790 per oz rendering your account balance to zero. Your broker will immediately execute a margin call under such circumstances closing not only this position but any others you currently have activated as well.

If you were to suffer such an experience, then you will find that you will be subjected to quite an intense level of stress. Very importantly, if you do not initiate appropriate policies that are capable of safeguarding your account balance from margin calls, then you will constantly exist in a state of anxiety. Such a frame of mind is not conducive to trading gold successfully over the long haul. You may also be surprised to learn just how long it can take to overcome the trauma resulting from margin calls.

Consequently, unless you strive to perfect your trading psychology then you will find great difficulty in sustaining quality decision-making over any specified period of time. This is especially so with gold trading because of the extremely high levels of volatility involved. For instance, the XAU/USD, the gold and US dollar currency pair, can generate price movements in the order of twenty times greater than those produced by the majors, such as the EUR/USD. Although such oscillations can produce enhanced opportunities for larger profits, they also increase risk levels substantially as well.

You must appreciate quickly that trading gold on the foreign exchanges involves multiple external and internal influences. As such, you will have great difficulty attempting to master all these aspects especially if you are a novice. Many analysts regard Forex as the ultimate way to monitor the health of the world’s economic performance because nothing else responds as well as it does to global developments, especially those currency pairs involving gold.

This is why experts advise that you should approach this massive task by breaking it down into well-defined steps of incremental risk. Specifically, they recommend that you should initially focus on designing or acquiring a trading strategy in order to trade gold with confidence. Once accomplished, you should then merge the concepts of a well-tested money management into it in order to optimize the protection of your account balance. If you can then trade gold using this perfected tool with a refined psychology then you will definitely enhance your chances of success.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.

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