6 Effective Strategies to Manage Gold Trading Risks
Historically, society has considered gold to be an excellent store of value. However, that’s not all. According to statistics, gold is one of the most highly-traded asset classes globally. In 2019, people traded volumes of over $145.5 billion of gold daily. Today, gold’s daily trading volume has exceeded $183 billion. Gold trading has been popular for centuries. It remains the most commonly traded metals commodity on the market, and that’s unlikely to change.
You might wonder why people trade gold. After all, one of the reasons gold has been popular is because it’s an excellent store of value. Logically, it would be sensible to store gold reserves. However, the reality is that gold’s intrinsic qualities make it a prime trading commodity. Gold’s applications are numerous, ranging from jewelry to industrial uses. Hence, people actively covet gold. In addition, gold’s scarcity makes it less susceptible to external influences like market uncertainty, inflation, and economic downturns.
Due to these reasons, gold remains one of the most commonly traded asset classes, trailing behind only stocks and treasury bonds. Naturally, you might be thinking about dipping your toes into the gold trading world. However, you’ll want to devise strategies to ensure you’re not putting yourself at risk when trading gold. Although gold is less susceptible to external influences, it isn’t immune to them. Follow proper risk management strategies when trading gold, just like you would with other asset classes.
A person holding gold coins
Effective Strategies to Manage Gold Trading Risks
When trading gold, you’ll need effective strategies to mitigate risks. Here are some strategies that can help:
Understanding the Various Factors that Affect thePrice of Gold
Gold, like other asset classes, has several factors affecting its price. Typically, gold reacts inversely to economic downturns and inflation. The primary factors impacting gold prices are the monetary policies of Central Banks and the balance of demand and supply. Research also shows that gold is positively correlated to Yen. That’s because gold and Yen both operate as safe heaven store of value compared to the US Dollar. In addition, you’ll also want to note the phenomenon known as gold seasonality. Historically, gold prices rise during the year’s second half. They generally increase during May, and the price hike continues until January.
The Right Trading Attitude and Discipline
Trading requires patience and discipline – two attributes challenging to master. Often, beginner traders become emotional when overwhelmed. That’s a big mistake that can have serious repercussions. Emotionality has no place in the trading of any assets. For instance, sometimes, traders will lose more money than anticipated on a trade. As a result, they become desperate to recoup their losses. They start making trades with higher risk and higher proportion of their trading capital. However, generally, these trades cause them to lose more money. In many instances, traders will try to recoup their profits by increasing the size of their positions. However, without researching, you’re exposing yourself to unnecessary risk. You’re likely to lose more investment capital.
Instead, consider creating and following a trading plan. Ensure that you don’t deviate from your trading strategy. Moreover, when you incur losses, remember that you’re likelier to recoup them over the long term instead of in the short run.
Gold bars with different weights
Stop-Loss Orders
Regardless of your chosen asset class, we cannot emphasize the importance of stop-loss orders enough. Stop-loss orders should be a fundamental part of your trading strategy to mitigate risks. Consider setting a stop-loss order immediately after making a trade. The reasons behind this are multifold. Firstly, stop-loss orders protect you from unanticipated market price movements. In addition, they help minimize your losses.
You’ll need to determine the right stop-loss order. To do so, assess your risk-reward ratio and set it accordingly. You can also consider placing a trailing stop order. Trailing stop orders close your position if the market dips a specific percentage below the current market price.
Control Your Positions
Many traders try to open as many positions as possible. However, that’s not a good approach. You can’t accurately predict the market every time. As a result, you’re vulnerable to incorrect analysis or market reversals.
However, you’ll need to open positions to make profits. Consider proceeding with a proper strategy. Ideally, always stick to the one-percent or two-percent rule when opening trades. These rules define that you only invest one or two percent of your trading capital into any trade. To illustrate, let’s assume you’ve got $10,000 in trading capital. Following the one-percent or two-percent rule, you’ll invest $100 or $200 in a single trade. These rules can significantly reduce trading risk.
Also, take time to assess risks before trading. Evaluate the impact losses can have on your account before proceeding with opening a position. For example, let’s assume you follow the two-percent rule and open four positions. If you close those positions at a loss, you’ll have lost 8 percent of your trading capital.
The High Risk-Reward Ratio
Many seasoned traders recommend following the high risk-reward ratio when trading gold. They argue that trading gold with a higher risk-reward ratio ensures more profitability.
For instance, if you’re trading XAUUSD, do so at a 1:3 ratio. Following this ratio, you’ll trade gold if there’s a chance you can make three times the amount you’re risking.
Focus on Risk Management
Many traders often focus on profits while overlooking risks. Risk management is a fundamental concept that every trader should understand – regardless of the financial instrument traded.
Focus on combining money management rules with the fundamental risk management principles to avert losses. Doing so will help you increase trading profitability and protect your investment capital.
Gold Bullions
Get Started with Crystal Ball Markets
A plethora of online investment platforms exist. However, the reality is not all online trading platforms are equal. If you’re interested in gold and silver trading, you’ll need a gold trading platform. Unfortunately, few metal trading platforms exist on the internet. However, fortunately, Crystal Ball Markets is one of the best online gold trading sites you’ll find. Visit our website today for more information. Alternatively, you can register with us today to get started.