Trading metals
By: Dwayne Buzzell
Tags: Trading, Stock Market, Forex

Trading metals

Summary: When trading metals online, there are two markets to consider: the silver and gold markets. These two markets are offered by forex brokers as well on top of the classical currency pairs and offer tremendous opportunities to find profitable trades.

Because the brokerage industry is so competitive, forex brokers are trying hard to differentiate from one another. This is being done either through the overall products that are being offered (currency pairs, metals, CFD’s — contracts for difference, indexes, etc.,) or through breakthrough in execution, technology, spreads, or both.

There are not many things a broker like CornèrTrader can add to make a competitive offer as the overall products being offered are more or less the same. What makes a difference in these instances is the customer satisfaction and how clients in general are being handled.

Coming back to trading metals online, gold and silver are traded the most even though some brokers are offering some other options like palladium, copper, etc. The reason why gold and silver are so popular comes from the fact that they are liquid against the US dollar.

In other words, there is always a counterpart at the other side of the trade and no matter the size of your trading, these markets will take it with not a single issue. Moreover, the supply and demand chain is not that short-ended as in the case of other metals offered for trading and this let’s fundamental factors like economic news to be incorporated when trading them.

The symbols for trading gold and silver are XAUUSD in the case of gold and XAGUSD in the case of silver. They are being both denominated in US dollars and this is normal as the US dollar is the world’s reserve currency.

Traders should pay a lot of attention when trading the two metals online as there are many things to consider.

Firstly, the digits in the case of the XAUUSD are different than the ones to be found in the silver pair. Therefore, a classical quotation for the XAUUSD will show, for example, 1312.05, so two digits, while the one for the XAGUSD will always have four digits, like 18.9654.

This is important because the difference between the ask and bid price, or the swap, is different from the two metals and sometimes it may make sense to trade gold and other times silver is recommended.

Secondly, always look for the correlation degree between the two metals. Taking a long trade on gold on a US dollar news and a long trade on silver on the same US dollar news is like taking two trades in the same direction on gold. This is overtrading and the two metals are not supposed to be traded like that.

The idea is to find a trading platform that allows to plot charts on top of one another, chose a common time frame and simply plot the two metals to see if they are correlated or not. If the correlation degree is quite high (and it is), look to trade the two metals when they diverge on a common US dollar news. This is the only way they could be traded in different directions at the same time, as they will tend to strive to get back getting correlated again.

Thirdly, use oscillators to find divergences when trading the two metals online. It is most likely that divergences will be common on the two charts. However, from time to time, gold may diverge and silver not, or the other way around, using the same conditions for both of them.

What to do in such a situation? Simple look at the correlated charts and trade the pair that is not confirming the divergence in the direction of the divergence seen on the other pair.

Silver is being considered gold’s little sister pair and often the returns of the two metals are different. For example, if for some reason both metals are bullish and move to the upside, one may jump 1% and the other one 3%. They moved in the same direction alright, but the size of the moves was different.

Last but not least, the idea behind trading silver and gold is to try to avoid trading them at the same time. This means to avoid opening a position on both of them at the same time, not to avoid trading them in the same direction.

Let me give you an example. Assuming both gold and silver are bearish. It makes no sense to trade both of them on the short side at the same time as it is like taking two different trades, at the same time, in the same direction. This is overtrading and a trader should avoid this by all means.

What a trader needs to do is to take the trade on one of the two metals, either gold or silver, and then wait for market to reach the target. If this is not happening and market goes against the original trade, the thing to do is to short the other one with the idea that a better entry has been found.

Such an approach is extremely popular in the US where regulators are forcing brokers to use the FIFO (First In First Out Rule). Using the example from above, instead of taking two trades on the same metal and then being forced to respect the FIFO when it comes to closing them, one should take a trade on the gold market and another on the silver one to avoid such troubles.

From a technical point of view there is no difference when trading metals online or trading a currency pair, and this is one of the reasons why forex brokers are offering metals to be traded. Same indicators can be used, with the same interpretation, and it is just like trading a currency pair.

The main difference comes from a fundamental perspective as metals are influenced by other things that are not necessarily influencing the currency market, like supply and demand and safe haven status.