How Gold Is Traded?
Gold can be traded in three main markets: futures, forwards and spot markets. When trading in the cash (spot) market, traders have to take physical delivery of their contracts at the expiration date. This means that when trading in the spot market, traders have to physically own or lease enough space to store their gold contracts.
When trading gold futures and forwards, you do not need to physically own or lease any space to store your contracts. Futures and forward agreements can be closed before expiry without having to take delivery of your contracts. Moreover, futures and forward contracts can be traded with high leverage. For example, a trader can trade 25 grams of gold by only depositing 10% (10 ounces) of the value of his/her contract as a margin.
The spot market is considered an over-the-counter (OTC) market because no central exchange exists where transactions are executed. The spot market is directly linked with the physical market. The price of gold in the OTC market is based on supply and demand, the physical availability of gold and its quality grade. Looking up gold prices is easy all you need to do is search up gold rate in Kanpur or for any other city and your search engine will give you all the info you need. But to actually make use of these data you need to understand the methodologies adopted by professionals.
Different steps adopted by professionals
Gold technical analysis is used to evaluate if the gold price is likely to go up or down by analyzing the long-term trend of the price. Gold can trend and trade sideways just like other capital markets instruments. Gold technical analysts use all kinds of tools and predictive algorithms to study the patterns and determine the future flow of the price.
- Moving Average
Moving averages can be used to identify trends, confirm chart patterns and provide trade signals. Simple moving averages (SMA) are the most common. Typically, longer-term moving averages are more reliable than shorter-term moving averages.
- Fibonacci Retracements/Arcs
Fibonacci retracements and arcs can be used to define support and resistance levels in a trend or to provide trade signals when a price retraces from a recent high or low. Fibonacci numbers have become popular with technical analysts because of their widespread use in various forms of technical analysis.
- Study the momentum using the Relative Strength Index (RSI)
The RSI measures the ratio of up-moves to down-moves and normalizes the calculation so that the index is expressed in a range of 0-100. The RSI is also used by investors for identifying the best entry and exit prices. This can be used in both trending and ranging markets. In this regard, it is worth noting that an asset can be overbought or oversold for a considerable time before reversing.
During a strong trend, the RSI may remain in overbought/oversold territory for an extended period. Likewise, extreme readings should not be interpreted as reversal signals in a sideways market. These observations are reflected in the following chart.
So now with these tricks in hand the next time you look up gold rate today in Uttarakhand or Bangalore you will have a better understanding of the trends.