How do I start trading gold?

Trading gold is an opportunity to diversify a portfolio, make a speculative profit or hedge against geopolitical risk. With the case made for considering entering the market, the next step is establishing how to buy gold.

Which are the best ways to dip a toe into gold trading?

You can try at eToro, they make buying (or selling) gold as simple as clicking a button. Trading can be transacted using a desktop or hand-held device so that you can keep up with market events wherever you happen to be located.

How do you limit risk and ensure you don’t get carried away?

Market risk relates to the price of assets you hold going up or down, which generates profits or losses. Trading systems include features such as stop-loss orders which can help mitigate market risk. Another risk to be aware of relates to the security of the broker with which you place funds. Choose one that is regulated by tier-1 financial authorities, is trusted by millions of users and supported by known banks. An additional way to manage counterparty risk is to use insurance protection.

In what ways do inexperienced traders generally make mistakes?

Trading gold in CFD format also opens the door to using leverage, which is a means of scaling up your risk-return ratio. It is something for intermediate rather than beginner traders, as the price of gold can be quite volatile.

If you decide to trade with leverage set at x10, this means the position size will be 10 times the amount of cash you allocate to it.

So if you enter in a buy of $5,000 of gold and use x10 leverage, the actual position size (the ‘exposure’) will be $50,000. A 4% cash move on a position of $50,000 generates a return of +/- $2,000.

A $2,000 cash return on a $5,000 stake sounds terrific, but a $2,000 loss would seriously damage your trading objectives.

Leverage isn’t a complicated principle, but it is one you need to understand fully. You can find more information here.

Are there specific strategies that are best suited when you are learning about gold trading?

Finding a strategy that suits you is essential. Different strategies require more (or less) of your time and some work better in particular market conditions. While going on the very personal journey of finding a method that works for you, ensure that you trade in a small way.

When getting started with gold trading, you should consider the following factors:

• Familiarise yourself with the online broker you are executing through and its exposure to commodities, specifically gold, and what instruments you can trade.
• Establish the minimum tradable position. Gold and other commodities typically require larger cash balances than equities and forex.

Gold can be high risk as an investment. It is vital to read a guide to trading gold before you embark on your first transaction.

Reprinted from eToro, the copyright all reserved by the original author.