Forex.com Tutorial
Trading Spot Metals and Oil
FOREX.com allows you to speculate on the price movements of gold, silver and oil as well as currency pairs.
Trading Gold and Silver with FOREX.com
Much like trading currency pairs, spot metals enables traders to take a long or short position in gold or silver while simultaneously taking the opposite position in the U.S. dollar or other major currencies. Spot gold and silver trades globally in an over-the-counter market, and prices float freely based on supply and demand. The spot price is the price quoted for the metal to be paid for (including delivery) two days following the date of the actual transaction (also known as the settlement date).
Trading is available 24 hours a day from Sunday at 10:00 pm GMT to Friday at 10:00 pm GMT. There is no central market, however, the main centres for trading spot gold and silver are London, New York, and Zurich. Liquidity is typically highest when European market hours overlap with trading in New York - roughly four hours a day during the morning for U.S. traders. There may be some illiquid periods for trading spot gold and silver around the close of the US market (10pm GMT to 11pm GMT). There is a twice-daily fix for gold and a daily fix for silver in London that helps set reference points for intraday prices.
Who trades spot gold and silver, and why?
There are many different reasons that drive investors to trade spot gold and silver:
- Speculation on the price based on the use of fundamental and or technical analysis
- Creating a balanced, diversified asset allocation model for an overall investment portfolio
- Applying risk management as a hedge against market volatility and financial crises caused by economic, political or social turmoil
Metal Quotes
How to read a spot gold or silver quote
Reading a spot gold or silver quote is very similar to reading a Forex quote. It is even represented the same way. For example, spot gold traded against the US dollar is XAU/USD.
In this example, it’s simple if you remember three things:
XAU/USD 900.25
- The first symbol listed is 1 troy ounce of gold
- The value of gold is always 1
- The price literally translates to; 1 ounce of gold is equal to 900.25 U.S. dollars
When the price or quote for gold goes up, gold has strengthened in value and is now worth more dollars than before. If the price of gold goes down, it takes fewer dollars to purchase 1 ounce of gold, and the value of the dollar has increased when compared to the value of gold.
Bid, ask and the spread
Just like other markets, spot gold and silver quotes consist of two sides, the bid and the ask:
The BID is the price at which you can SELL.
The ASK is the price at which you can BUY.
The difference between the bid and ask prices is called the spread.
The dealing panel from the FOREX.com trading platform show the current bid (the price at which you can sell) and offer (the price at which you can buy) for spot gold. A trader can buy or sell into a position with a simple click of the mouse.
What does it all mean?
Spot gold and silver prices are quoted internationally in U.S. dollars per troy ounce. In this example, a quote of XAU/USD 900.25 means that 1 oz gold is equal to $900.25. If you buy a single lot of gold (1 lot = 10 oz) at this price and sell it at a higher price, your profit would be the difference between these two prices. In this way, trading spot gold on FOREX.com’s trading platforms is nearly identical to trading currencies.
A typical quote you might receive for spot gold is 900.25/75. This means that you could sell one or more lot(s) of gold at 900.25, or buy at 900.75. The spread you would pay in this example would be the difference between these two prices (900.75-900.25) or 0.50.
The dollar amount represented by the change in price will depend upon the size of the trade you have placed. The smallest amount you can trade with FOREX.com is 1 lot, which represents 10 troy oz. At 1 lot, the smallest price change possible (0.01) is equivalent to $0.10.
Let’s look at an example:
Let’s say you decided to buy 1 lot of XAU/USD (spot gold) at 900.25.
A few minutes later, the bid (or sell) price has risen to 900.95, and you decide to exit your trade. You bought 1 lot at 900.25 and sold at 900.95, making 70 pips in the process. 70 pips, at $0.10 per pip, equal $7.00.
Now, let’s say that we once again buy 1 lot of XAU/USD at 900.25.
A few minutes later, the bid (or sell) price has weakened to 899.60 and you decide to minimize your losses and sell the 1 lot of XAU/USD. The difference between buying 1 lot at 900.25 and selling 1 lot at 899.60 is 65 pips. 65 pips, at $.10 per pip, equals $6.50.
Pips or points, what’s the difference?
Like Forex prices, spot gold prices are quoted in tiny increments called pips (“percentage in point”). Located at the second decimal place for a spot gold quote, or 0.01, each pip represents 1 cent in dollar value.
Hedge against inflation
One of the most common descriptions of gold and silver as investments is that they are a hedge against inflation. The thinking is that as the inevitable decrease in buying power affects currencies, owning gold is one way to hedge against the value of your wealth decreasing. Doing so ensures that you will receive a commensurate amount of currency for the amount of gold you own, no matter what the inflation rate is.
Alternative to the US Dollar
Gold and silver are also used as a hedge against the US dollar in the current economic environment. Thus when the reserve currency comes under pressure, investors seek out other alternatives.
A “safe-haven” investment
Another view of gold is as a “safe-haven” investment. During times of high volatility and risk, investors may move funds to gold as a way to safeguard against uncertainty.
Understanding economic and political factors
Indicators that impact inflation such as the Consumer and Producer price indices, interest rate announcements, and treasury auctions play a large part in determining the inflation rate, and therefore have an impact on gold prices. Macroeconomic indicators, such as the Unemployment rate and Gross Domestic Product (GDP) also shed light on the strength of an economy, and may lead investors to lean towards or away from moving money into gold. While the current economic environment has seen some of the traditional strong negative correlations between precious metals and the US dollar weaken, they can resurface at any time.
Political events can also have a significant impact on the price of gold. If uncertainty arises over conflict in the Middle East, this might have an effect on the perceived safety of an investment in a country’s bonds or currency, and to hedge against this risk, investors might move funds into gold or cash. Oil and other commodity prices may also be affected, and the commodity relationship might have a carry-over effect into the gold markets, pulling or pushing the price of gold in the same direction as oil.
Typically the spot gold market is somewhat volatile, given the ability to enter and exit trades several times a minute. For this reason, prices may be more susceptible to short-term fluctuations that do not necessarily follow a long-term trend.
Leverage and Margin
How leverage for spot metals works*
Leverage for spot gold and silver trading is set at 100:1. This means that for every $1 you have in your account balance, you have $100 in buying and selling power for gold trading. As a result, leverage increases a client’s buying and selling power and enables clients to participate in a market that may otherwise be cost prohibitive. Keep in mind that increasing leverage increases risk.
How margin for spot metals works
Margin is the amount of money you must have in your account to hold a particular trade. At 100:1 leverage, your margin factor is 0.01 (1%). This means that you are required to have a minimum cash balance of 1% of the total value of the positions you hold in your account at any one time. If you fall below this amount, your trade may be closed automatically, otherwise known as being liquidated.
Let’s look at an example:
Let’s say you would like to place a trade of 1 lot (10 troy oz) of spot gold, and you would like to buy it at $920.55. The amount of margin you would be required to maintain would be 1% of your trade size.
So, 10 (oz) multiplied by the price, 920.55 and multiplied by the margin factor, 0.01 would give you $92.06.
10 x 920.55 = $9,205.50
$9,205.50 x .01 = $92.06
This is the margin requirement for a single lot of spot gold bought at $92.06. If your account balance falls below this level, your trade would be automatically closed. Another way to look at this example is to say that 100:1 leverage gives you the ability to trade 10 ounces of gold, at 920.55, with $92.06.
Calculating P&L
Profit and loss calculations for spot gold and silver are fairly simple. The smallest increment of a spot gold price is 0.01. For spot silver, it is .001. The smallest trade you can place in spot gold or silver is a single lot. For gold that is 10 troy ounces, and for silver it is 500 troy ounces. At this level, each pip is worth $0.10 for gold and $5 for silver. For example, a change in price from 920.55 to 920.85 in gold means a difference of 0.30, or 30 pips. If you are trading 1 lot, and each pip is worth 10 cents, then the profit or loss from this trade would be $3.00.
If you decide to trade more than one lot, the value of each pip is simply multiplied by the number of lots you are trading.
Trading oil at FOREX.com
Oil contracts at FOREX.com trade like currency pairs, though with different margin and leverage. One oil contract represents 100 barrels (bbls) of oil, priced in US dollars.
Oil contracts are ‘Contracts for Difference’ (CFDs), which are over-the-counter trading instruments with an expiry date that are cash settled.
Types of oil
FOREX.com offers clients 2 oil contracts – Brent Crude (BCO/USD) and West Texas Intermediate (WTI). Crude oils are classified as either Light or Heavy depending on their API gravity, and as either Sweet or Sour, depending on their sulphur content. Brent Crude is a “light, sweet” blend, gathered from several oil fields in the North Sea, which is where the name ‘Brent’ comes from. It is typically priced higher than the OPEC composite price. West Texas Intermediate (WTI) is a “lighter, sweeter” blend, and is typically priced higher than Brent. (Source: The Energy Information Administration)
Who trades Oil, and why?
Trading in petroleum products spans many industries, and as such, is affected by both high-level geopolitical factors, as well as the trading activities of speculators. Players in the global oil trade range from entire economies, to large corporations, to traders on exchanges, down to the average daily consumption of gasoline in your car. Airlines may use oil trading to protect against an anticipated price increase, and Wall Street traders may trade oil futures to attempt to profit from market movements. The factors that may influence the price of oil are similar to that of a currency pair, in that they are affected by market-forces. These can be political, financial, or even weather-related.
How is the FOREX.com oil price derived?
FOREX.com’s prices for BCO/USD and WTI/USD are derived from the prices of futures trading on the Intercontinental Exchange (ICE).
Our price is derived from the current (front month) price of the ICE contract up to the 2nd Wednesday of each month, Between that date and the expiry date of the ICE contract, the FOREX.com oil contracts will be priced from the next futures contract month to avoid expiry-related volatility.
Oil Quotes
How to read an oil quote:
Reading an oil quote is very similar to reading a Forex quote. It is represented the same way, e.g. BCO/USD, or WTI/USD.
Oil prices are quoted internationally in US dollars per barrel. A quote of 45.50 for BCO/USD means that 1 barrel of Brent Crude oil is worth $45.50.
Bid, ask and the spread
Just like other markets, Oil, spot gold, and forex quotes consist of two sides, the bid and the ask:
The BID is the price at which you can SELL.
The ASK is the price at which you can BUY.
The dealing panel from the FOREX.com trading platform show the current bid (the price at which you can sell) and offer (the price at which you can buy) for oil. A trader can buy or sell into a position with a simple click of the mouse.
The difference between the bid and ask prices is called the spread.
Trading oil – using BCO/USD as an example:
A typical quote you might receive for Brent Crude is 50.55/62. This means that you could sell one or more lots of BCO/USD at 50.55, or buy at 50.62. The spread you would pay in this example is the difference between the bid and the ask prices (50.62 - 50.55) = 0.07.
The size of the trade you place will determine the amount of profit or loss generated by a price movement. The smallest amount of Brent Crude you can trade with FOREX.com is 1 lot, which represents 100 barrels. At 1 lot, the smallest price change possible (0.01) is equivalent to $1.00.
Let’s look at some examples:
Example 1:
You buy 1 lot of BCO/USD (Brent Crude) at 50.55.
A few minutes later, the bid (or sell) price has risen to 50.90, and you decide to exit your trade.
You bought 1 lot at 50.55 and sold at 50.90, making 35 pips in the process (50.90 - 50.55).
Profit on your trade is calculated as 35 pips, at $1 per pip = $35.00
Example 2:
You once again buy 1 lot of BCO/USD at 50.55.
A few minutes later, the bid (or sell) price has weakened to 50.20 and you decide to close your position to cut your loss.
You bought 1 lot at 50.55, and sold at 50.20, a difference of 35 pips.
Loss on your trade is calculated as 35 pips, at $1.00 per pip = $35.00
Pips or points?
Like forex and spot metal prices, oil prices are quoted in very small increments called points, or pips (“percentage in point”). A pip refers to the second decimal place for an oil quote, i.e. 0.01. Each pip represents 1 cent in dollar value
When calculating the value of your trade, remember that oil trades in lots of 100 barrels. This means that a one pip (1 cent) movement in the oil price represents a $1 price movement for each lot that you are trading.
Supply and Demand
Oil is a tangible and in-demand commodity. The largest consumer and importer of oil in the world is the United States, followed by China and Japan. Anything that disrupts the supply of oil is guaranteed to influence its price. Factors such as extreme weather, war, terrorism, political unrest, and OPEC production decisions have the potential to push the price of oil up and down.
Since oil is used in the manufacture of many different consumer products, from gasoline and heating oil to fertilizer and cosmetics, the demand for these products can also have an effect on the value of crude oil. When consumption falls in these products, the demand for crude oil also falls, and this can have a negative effect on prices.
Inventory numbers, sales figures and the EIA petroleum status reports all serve to shed light on the difficult task of measuring overall oil consumption. Traders can look to these reports and announcements to better understand the factors influencing the consumption of oil.
Seasonal Factors
The seasonal consumption pattern can also have an effect on the price of crude. During cold-weather months, more heating oil is consumed than in warmer months. In contrast, the “summer driving season” in the US frequently sees a rise in the price of gasoline, in reaction to increased demand. The hurricane season in the Gulf Coast of the United States also has potential to influence the price of oil, since hurricanes pose a threat to refineries located in the Gulf of Mexico. Speculators are aware of these patterns and their sentiment may influence their trading decisions.
Speculation
Recently brought to the forefront of the global oil debate, thanks to the extreme price-spike in the summer of 2008, is the role of speculators in determining the price of oil. While speculators do serve to provide liquidity to a market, the fact that traders without the need for physical delivery of the commodity have the ability to significantly move the price of oil has raised eyebrows around the world. The most fundamental fact regarding speculators’ presence in the market is that traders’ sentiment may not be strictly supply and demand based, and as such the expected influence of supply and demand on prices may not always be as important as the overall market sentiment towards the direction of oil prices.
Currencies
Since oil is quoted in U.S. Dollars, many of the factors influencing the dollar can carry over into the oil markets. In a general way, the direction of oil prices is regarded as being opposite to the direction of dollar strength. A stronger dollar means that it takes fewer dollars to purchase a barrel of oil. This is typically good for consumers. Inter-currency relationships then come into play, since a barrel of oil worth $100 is good for producers (and bad for consumers) when the dollar is strong relative to other currencies. However, if $100 only translates to 64 Euros (a weak dollar), high oil prices might not mean as much to producers, since their profits in dollars would not be worth as much.
Leverage on oil contracts
FOREX.com’s leverage for Brent Crude and West Texas Intermediate oil contracts is set at 50:1. This means that for every $1 you have in your account balance, you have $50 in buying and selling power for oil trading. Keep in mind that leverage increases risk over full value trading.
How margin for oil trading works
Margin is the amount of money you must have in your account to open and maintain a position. At 50:1 leverage, your margin factor is 0.02 (2%). This means that you are required to have a minimum cash balance of 2% of the total value of the oil positions you hold in your account at any one time.
At FOREX.com your risk is limited to the funds you have on deposit with us. There are no margin calls, so if your account balance falls below the margin requirement we will automatically close your positions to ensure that you cannot lose more money than you have in your account.
As an example:
The current West Texas Intermediate price is quoted as WTI/USD $51.55
You buy 1 lot (100 bbls) at $51.55.
Your margin requirement is 2% of your trade size, and is calculated as follows:
Trade size x price x margin factor (percentage)
100 (bbls) x $51.55 x 0.02 = $102.22
Another way to look at this example is to say that 50:1 leverage gives you the ability to trade 100 barrels of West Texas Intermediate at 51.55, with $102.22.
Calculating Profit and Loss
Profit and loss calculations for trading oil are fairly simple.
The smallest increment of an oil price is 0.01. The smallest trade you can place is a single lot, or 100 barrels (bbls). At this level, each pip is worth $1.00.
A change in price from 52.55 to 52.85 means a difference of 0.30, or 30 pips. If you are trading 1 lot, and each pip is worth $1, then the profit or loss from this price movement would be $30.00.
If you trade more than one lot, the value of each pip is simply multiplied by the number of lots you are trading. Rather than each pip being worth $1.00, if you are trading 5 lots then each pip is now worth $5.
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