The Difference Between Gold Futures And Gold Options
If you plan to invest in gold, you may wonder if gold options or futures are a good way to do that? Let’s start by defining each concept. What do gold options refer to? They are based on gold futures and represent contracts. Those who own gold options are allowed (but not required) to take a short or long investment position at the strike price and in the respective gold futures. When the option expires, you no longer have this right. Options are traded on exchanges such as the Tokyo Commodity Exchange (TOCOM) and the New York Mercantile Exchange (NYMEX). Futures are traded in series of one hundred gold ounces on NYMEX while the prices of options are quoted in dollars and cents. On the Tokyo Commodity Exchange, options are quoted in yens and traded in 1000 grams. The two kinds of options are put and call. Investors prefer call options when they believe the price of gold will go up. It is just the opposite with put options, and investors favor them when they think gold prices will go down.
Options exchange trade is not limited to call and put buying. Selling and spreads is another commonly used strategy. The latter is carried out by buying and selling options at the same time.
It seems like options are quite similar to options. What is the difference, if any? Buying and selling gold futures is a way to manage the risk of trade with gold that gold producers and owners face, with view to the unstable prices. Gold producers use a short hedge to make sure their gold with be traded at a specified price. A short hedge is, for example, when a mining company signs an agreement to sell a certain amount of gold that will be delivered at a certain time. The price is agreed to be based on the price of gold on the delivery date, which is in four months. The company locks in the price by selling short a specific number of futures contracts on the respective exchange. For example, the company shorts fifty futures contracts if each contract has fifty ounces of gold.
This method is referred to as placing a hedge around the gold, making sure that the gold will be sold as agreed. Gold options offer advantages such as extra leverage and the possibility to limit losses.
There are some factors, which determine the trading price of gold futures. These include changes in supply, including whether production quantities have been met or exceeded. The technology and infrastructure the company employs are also important in determining whether the miner will be able to extract gold. Another factor is changes in demand and whether some states are planning to increase their gold stock reserves. Recently, China and Russia have done so. With various factors influencing the price of gold futures, the services of a professional advisor may be required. Gold futures are a risky investment instrument although profits may be high.
How to buy gold? You will find all the answers in this guide to precious metals.
Understanding Candlestick Patterns (Part I)
Candlestick patterns can reveal a lot about the underlying market sentiments. Using one of these candlestick patterns without knowing about the previous trends wouldnt be very useful. Based only on the market activity of the previous few days, most candlestick patterns are valid. For instance, some of the candlestick patterns indicate a change in trend.
Usually the context in which you find the candlestick pattern tells you a great deal about what you should do based on that candlestick pattern. Lets consider simple candlestick patterns first.
The Bullish White Marubozu: It represents the day when bulls control the market and push prices higher from the opening to the closing. The longest white candle is the most bullish of the candlestick patterns. Chances are the bulls will be back for more buying the following day with the long white candle closing near the high.
This means that buying has been taking place all the day. With the long white candle, the low price on the candlestick is a good support level. One common feature of the long white candle is an open near the low of the day and a close near the high of the day.
The Bullish Dragonfly Doji: For a Doji to be created, a day must begin and end with the same price. A Doji is formed when the opening and the closing prices are the same. So essentially there is no stick in the candlestick.
Doji patterns are usually associated with a market turn. Doji depicts a day where the battle between the bulls and the bears has been fairly equal. A Doji may not look very exciting to you. But dont be fooled.
The price action depicted by the Dragonfly Doji bodes very well for those hoping that prices go higher. The low of the Dragonfly Doji day is considered a near term support level. A Dragonfly Doji is unique in that three of the four candlestick patterns- the open, high and the close are all equal. You can make smart trades based on the Dragonfly Dojis.
The Bearish Long Black Candle: A long black candle means that sellers take over at the beginning of the day and push prices lower and lower until the end of the day. The long black candle is the direct counterpart of the long white candle discussed earlier. The long black candle is as bearish as it gets.
Price sensitivity is very low for these sellers and they are selling just to get out of their trades regardless of the prices. The long black candlestick pattern is a good bearish signal. You can capitalize on this fact. Seeing this type of enthusiastic selling must give you the confidence after the appearance of the long black candle that the bears will be in control for a few more days.
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Currency traders use different approaches in their trading. Some use discrete trading system and others use mechanical trading systems. Majority of successful traders use self developed mechanical trading systems that they developed themselves. There are always advantages and disadvantages of different trading systems. The majority of unsuccessful traders depend on discrete trading method that depends on their experience and technical knowledge.
Many traders use their own developed trading systems. There are many actively developed trading systems for sale as computer programs also known as Expert Advisors or Robots. Theses robots vary widely in prices. It can be from a few hundred dollars to a few hundred thousand dollars.
Sometimes these computer programs are developed for a certain bank or a corporation. The significant advantage of these programs is that they generate signals that can be used by the trader for trading.
The discrete trading method used by many traders is like an artist trying to adapt to different market conditions and using flexibility and tactics corresponding to the particular market condition.
In case of a discrete trading method, the traders mood and health can greatly affect the outcome of each trade. The main disadvantage of the discrete trading approach is due to the stress factor influencing the trader, the unstable trade results.
A mechanical trading system prevents the trader from quick adjustment of trade tactics and strategies under changing market conditions. However, it almost completely removes the influences of the stress factor. It also reduces the negative pressure on a trader which is obviously a big plus.
A mechanical trading system also doesnt allow the quick customization of the trading system in cases like the change of the account size. There are eight requirements that any ideal trading systems should fulfill. These conditions are:
1. A trading system should allow for the maximum adjustment to any traders psychological character and makeup.
2. The trading system should depend on trading methods that are universal and does not depend on a particular market condition at any moment of time.
3. The trading system should be simple, logical and understandable comprising of ready to use elements and units.
4. The trading system should provide specific price signals for the trader for entry and exit positions some time in advance.
5. The trading system must allow some room for the traders creativity.
6. There should be some flexibility to modernize and adjust the trading system in accordance with the changing market conditions without violating its main principles and elements of the trading system.
7. The trading system should relieve the trader from emotional and psychological stress in trading and should be ruled based that do not depend on emotions.
8. It should be customizable so that different traders can use the same method.
No one trading system can fulfill all these requirements. Change of market conditions could lead to negative results from a previously effective trading system.
The only way of satisfying these conditions is through developing a diversified trading system. Trading systems based on these requirements could be complex and adjustable. It can consist of a set of systems that can be used as the basis for specific trade tactics at any given moment.
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