A Simple Gold Trading Strategy

Futures contract is a buy or sell agreement between the buyer and the seller at a specified futures date at a specified price. Futures contracts have standard format meaning they have a standard delivery date with standard terms and conditions that tell how many trading units will be covered by one contract. These contracts get traded on the government regulated futures exchanges like the Chicago Board of Trade (CBOT), New York Mercantile Exchange (NYMEX), the Chicago Mercantile Exchange (CME) or LIFFE (London International Financial Futures Exchange). Most advanced countries have well developed futures exchanges. The important question is how to manage risk in the precious metals exchanges. This is how professional traders make money in the precious metals market. They manage risk first and then think about taking profit. Now, this precious metals strategy involves removing profits so as to manage risk. Many new traders don't know how to remove profits and keep on riding the trend till its sudden reversal. This makes them lose all their unrealized profits.

Let's illustrate this precious metals trading strategy with an example. A gold futures contract consists of 100 ounces. Now, the margin requirements can vary from one broker to another but it is generally around $5,000. This means you can control 100 ounces of gold with $5,000. Each point the gold futures contract moves up or down, you make $10 or lose $10. Suppose, you bought the gold futures contract and it moved up by 50 points. You make $500 less the commission and other fees).

Now, suppose you buy one gold contract and that contract moves 50 points by the end of the week. You sell it at that and make a nice $500! This is your first trade in a series of four trades that you are about to make in the gold market.

Now, your second trade starts in a series of four trades. You are happy with your first trade. You have made $500. You enter the market again with two contracts now. You wait for a few days and lo and behold, the market moves 50 points up as you had expected. You sell the two contracts and make a nice $1,000 profit. Your second trade is now complete.

Next week you buy three contracts. Rumors are flying about gold prices rising again. You want to profit from it. This time, the contract goes up by 100 points. You sell your three contracts and realize your profit of $3,000. This is the third trade in a series of four trades.

Thus you had completed the third trade in the series of four trades. Now, you are ready for the fourth trade. You watch the market. It is moving up again. You enter with four contracts this time. You wait for a few days and the market is up by 50 points. You sell all the four contracts and make a profit of $2,000. Your total profit in this series of four trades is $6,500. This profit you made in just a matter of few weeks which is not bad. Now, you remove the profit from your account and start all over again with your first trade with one contract in a series of four trades.

The essence of this gold trading strategy is to remove your profits from your account once the series of four trades is complete and start all over again with one contract. These series of four trades you can repeat as many times as you want removing the profits at the end of each four trades like above. This is how pro traders trade and how you should trade too by pyramiding your position through a series of four trades.

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