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My Experiences Trading Gold and Silver Commodity Futures Contracts and Options

Thomas Cathey
 


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Sometimes, all that glitters is gold. What a great trading market! Here's some valuable hints and kinks taken from actual trading experiences.

Gold is a great commodity futures market for trading. As of January, 2007, $3,375 of account margin controls $61,300 of gold. (100 ounces valued at $613 /oz. ) That's about 5.5% money down, giving tremendous leverage. A $1 move in gold futures equals $100. Thus, a gold futures contract move from $400 to $500/oz equates to a $10,000 profit or loss.

Within the last year, gold has become more liquid for trading. The CBOT (Chicago Board of Trade) has begun electronic metals trading and is now the preferred way to trade gold FUTURES. In the past, using the Comex exchange in New York was difficult at best. The price slippage was extensive and fills were slow during active markets. But all that has changed. However, the Comex still serves a purpose. At the present time, gold OPTION executions are best at the Comex. It pays to know WHERE to trade as well as what and when.

When trading gold options, use a broker who can call the floor directly to get bids-offers and fills. Many times a good broker can give you an immediate fill from the floor. This can be a great advantage during very volatile times to know your exact position. Not all brokers are able to do this for you.

Gold is a market known for its large price swings. When there's crisis in the news, gold is one of the more sensitive commodities. I've known gold day traders who trade for small one to two dollar swings. They love the daily moves. While others hold for longer term price swings of $20 - $100 per ounce. Gold is one of those markets that usually has enough action for any form of trading.

Gold is also known for false breakouts and triangle patterns. The breakouts are especially prone to breaking above an old high and then moving back into the middle of the range. Triangles in gold can be seen quite often over the last 40 years or more. A good example is to look at the 1979-1981 gold bull market. You'll see many triangles (on daily bar charts) that are textbook perfect. There's many ways to trade triangles once they are identified as such.

Buying options on gold is best executed when the market is quiet. Waiting for counter-trend advances and declines can also result in great fills. Gold has a tendency to trade counter-trend overnight. In a bullish market, buying calls or futures early in the morning after an overnight decline may result in a profitable trade later in the day. Selling a big up move is often best done in the morning after a series of strong upside moves. A wide range day out of the ordinary many times signals a turning point. All these technical techniques can give you good entries and exits. In addition, go AGAINST the news for buying and selling into price spikes. The gold futures market swims in seas of fear and greed. Keep this in mind when looking for the price turns.

When trading gold, watch a few other markets for clues. Although nothing is in concrete, the U. S. Dollar is probably the best reverse indicator of gold. Like all other U. S. markets, gold is traded in dollars, though gold seems especially sensitive to this relationship. When the dollar drops you need more dollars to buy the same amount of gold. When the dollar starts rising it may be the beginning of a drop in gold. Careful, there could be a lag until this actually occurs. This lag could give you time to position, but if it doesn’t happen, the subsequent reversal could be sharp and fast.

Watching the other metals like silver, platinum and copper may give you clues as to the direction and magnitude of gold futures and options. At times silver can go counter to gold in certain types of cross-market activities. However, this trend-bucking usually doesn’t last long.

When gold is very active, it's a good idea to place your protective stop loss orders at the farthest pivot point you can withstand. . . still staying within your risk parameters of 5%-7.5% per trade. The gold market loves to spike and take out the maximum amount of players before a big move. Gold also tends to trend well since it is based on large geopolitical factors that are hard to turn around. Keep your eyes on the break-outs to higher and lower levels. They are very telltale as to what news the global community is responding to. Watch gold's price action as related to news. In other words, if the news is very bullish and gold cannot rally strongly, then the next move will probably be down, and fast!

Here's how I look for opportunities in the metals markets: First I generate a TimeLine forecast that shows a strong move up or down in a particular metal. The TimeLine is based on time cycles and other preprogrammed patterns. I then determine if the move is expected to be choppy, trending, and for how long. This helps us focus on possible directional futures/option positions or writing options in a range, or even writing options with the trend.

Next I use automated option software to search for the best of 1600 strategies based on the expected market move. I compare these option to option combinations against futures to options combinations. At some point I will find a compromise between risk, profit and simplicity in one or two strategies. In hindsight there's always a best strategy we could have used. Keep this is mind when narrowing down the choices. When finished, we want to have one or two potential trades to work with. We call the selected few, “high probability, low risk trades. "

Remember there is more to planning a trade than just coming up with a forecast. The market may move as predicted but we can still lose by choosing the wrong trading vehicles. Pick the right vehicles and strategies that will allow us to stay in the market without excessive fear, but still carrying calculated risk.

We NEED to take on calculated risk or the market will not pay us for our services. In addition, the vehicle has to move far enough to make a profit without letting the expense of protection eat us up. Excessive protection (risk avoidance) can come in the form of option premiums, too close-in stop loss orders - and overdone, complex spread strategies. Matching a forecast to a strategy is an important skill to succeed in commodity trading.

Good Trading!

There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.

Thomas Cathey - 27-year trading veteran heads the managed futures division of Thomas Capital Management, LLC. Get FREE, his complete 44+ lesson, “Thomas Commodity Trading Course" and free weekly TimeLine Alert Forecasts. http://www.thomascapitalmanagement.com/commodity/welcome.htm Main site: http://www.ThomasCapitalManagement.com

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