Trading Gold for Beginners

Most commodity brokers know that the common element that attracts potential commodity traders is the interest in buying gold or silver.   Most beginners only consider the buying of gold and not the selling of gold.  This is a mistake as gold is just a commodity and it is subject to buying frenzies followed by slow sell offs in its price.  Another important aspect of gold is the public becomes interested when the gold is spiking to new higher levels and makes the evening news.  Gold can be traded in an intelligent way, but not as a fad exercise.  The general public is the last to know that it was time to buy gold and have a tendency to come into the market at tops or near a top.  The time to accumulate gold is when it is out of favor and not making the news every day.  The time to sell it is when the spiking price comes to a halt and the economy factors that were responsible for the rise are turning around.  Two obvious factors in buying gold are a rising price in oil and other commodity prices and a sharp rise in interest rates.  A weak currency can also be an important factor for a rise in gold prices, since historically the bad currency drives people to put their money in a safe pace.  The rising price of oil and the weak US dollar were behind the rise in gold prices during 2006-2008.

There are a number of Internet sites that can quickly educate a beginner in understanding the way gold reacts to the world economy.  Also most top futures brokers have good articles and brochures that are easily obtained from them.  Buying real gold and trading gold futures are worlds apart.  Owning the gold and trading future contracts is a different exercise and takes a different mindset to be successful in the activity.  Owning gold is a long-term proposition and can be used by people who have extra money that they are willing to tie up in buying gold and being patient for the price to rise.  Buyers of gold in the early 1980s had to wait until 2006 and later to just get back to the price they paid for the gold.  This was not a good deal for those gold investors, as the time value of money was not covered by the higher prices.

Metal's Futures trading is another way to participate in gold’s price changes.  The problem that new traders have is they only want to play the long side of the market and are not willing to sell at the tops of markets.  This is like a boxer fighting with one hand tied behind their back. The market trend should be the deciding factor on buying or selling gold.  Future traders do not care which side they are playing on as long as it is the right side and with the current trend.  If a trader is only comfortable on the long side, they will have to miss some very easy money making trades on the short side.  Both side profits are taxed the same way when traded on a short time frame.  Gold trading takes a while to learn and do well.

For the most up to date data on Futures Prices go to Forexpros.com

Commodity Trading Basics

Commodity trading is a highly leveraged way to trade in Futures Prices of grains, meats, metals, gas or oil.  People in countries around the world actively trade many of these markets.  Oil, gold and silver are the leaders in the commodities that are traded worldwide.  The grains, cattle and hogs have a strong following in the US and other grain producing countries.  Due to the Internet, all of these commodities can be traded from anywhere a traders lives. 

A new trader to the commodity market would be wise to open an account with a broker that has been trading for many years.   The broker, that is doing their job, will keep the new trader from making many basic errors that befall a new trader.

The first and the most common mistake is the new trader tries to trade these markets like they would a stock investment.  This can be deadly to a new trader’s real money account.  Buy and forget is not the way to trade any commodity contract.  Options on a commodity contract are friendlier as the amount of loss can only be the cost of the option that was purchased.  Selling of options carries the same risk as being long or short the commodity contract.  Only the purchase of options has the cost of the options as a limit to the loss on the position.

New traders are not used to the fact that these trading vehicles are highly leveraged.  The leverage can be a moneymaker for the trader or a strong contributor to a sizeable loss.  For this reason, Stop Loss orders should always be used to protect capital.

Once a trader knows what they are doing, they can use a discount forex broker that has low trading commissions as long as they are financially solvent and also have solid trade executions.  Since this is a fiercely competitive situation, the commissions and the margin requirements can be negotiated depending on the commodity traded and its inherent volatility   A trader should be careful of some of the really low commissions that some of these brokers offer as the executions and their willingness to cover their mistakes will be suspect or even non-existent.

There are many good books on commodity trading and how to become a good trader.  One factor that makes a good trader is understanding the risk that any trade exposes the trader too.  Over trading the account is a common mistake of both new and existing traders.  There are many rules about the capital required to handle any level of contracts in play.   Usually it is a percentage of the total capital available.

Commodity trading takes careful analysis of the fundamentals and then using good entry and exits prices.   Most commodity traders use technical analysis to provide these trading points.  One factor that cannot be controlled is a market that suddenly moves the limit in any given day.  Stop Loss orders may not be executed, as there are no traders willing to take the opposite side of the trade.

Start small and with less volatile commodities to get your feet wet.

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Support and Resistance

Support is a price point on a chart where the market has a tendency to stop going down and bounce up to a higher price.  Resistance is the mirror image of this scenario.  This is a price point on a chart where the rising market stops and falls off in price.

Charts of different time periods are useful in determining strong support and resistance price levels.  A price level from a five-minute chart would not be as strong as one that had formed in a daily chart.  The daily chart is used by big traders to set buy/sell price levels.  These levels are found at support and resistance price levels.  In order to day trade in a profitable manner, it is crucial that the day trader know where these levels are on daily charts and shorter time period charts.  The trader must be aware of likely price points that have a large number of buy or sell orders.  These market action points on a chart will be found at the support and resistance chart patterns.  With this congestion of both buy and sell orders, it becomes very difficult for the market to move through these price levels, which then become confirmed chart support and resistance price levels.

The small forex trader can use these levels as an entry point or an exit point for an existing trade.  One of the oldest theories of trading is try to be on the side of the players with strong hands.  Strong hands are players with deep pockets and a great deal of trading capital.  This side of the market is the place to be if a trader wants to consistently make winning trades. The trade direction does not matter as the profit is made by selling first and buying back later at a lower price.  The opposite is true too when buying first and selling later at a higher price.  It is the direction of the trade and the market being the same that determines if the trade will be successful.

An obvious stop loss point is when the market breaks through a support or resistance level.  Your position is going against your trade and this signal is one that needs to be respected.  Another facet to using these chart points to enter trades is the stop loss trades can be set rather tight to keep losses at a minimum.

Controlling losses is what this type of leverage trading is all about and these easily discerned chart levels could be used to make excellent entry points.  Violation of the support or resistance is a strong signal to close out a live trade.

Unlike stock trading, this type of trading cannot be approached on the market. Leverage is a two way street and it will eat up trading capital if the trade is allowed to move against the trader to far.

Some traders will not enter a trade at these chart points until they see the bounce happening in real time.  The idea is to get confirmation of the support or resistance level.