Spread Betting Example in Gold
Well as you all have seen overnight gold has had a substantial move overnight. This has proven to show how spread betting in gold could be attractive, but at the same time dangerous. A small summary of what happened, on Wednesday gold was trading in the region of 1780 USD, after Fed chairman Bernanke failed to reassure the market of further quantitative easing there was a 5% sell off in Gold. Why was this? Briefly, Quantitative easing is printing money, which is inflationary. So many will turn to gold as safe have to protect the devaluation of their money.
Now let’s get back to our gold spread betting example. I Have split this post in two parts – First a simple spread betting example how to trade gold, Second – Going one step further calculating your risk.
A) Spread betting example – how to trade gold
When Spread betting a new product the first question to ask your self is:
1) What is a point value in Gold?
You are eager to trade Gold, and you ask yourself, what is the Pound per point value? Is it 1 GBP for every cent or for every dollar movement in gold? To find this out, I have a screen shot of an IG account. In the ticket below, you look for the decimals to understand the value of your trade. When spread betting you always trade the numbers to the left of the decimal place. Therefore, you are trading 1 Pound for every big number movement. Therefore if gold goes from 1712 USD to 1713 USD this is one point movement.
2) What is the minimum distance of my stoploss? as you can see from the ticket above the stoploss has to be at least 2 USD away from the current market price.
3) What is the deposit I need to put down? Lets bring the Info Box. As you can see below, the deposit factor is 14. This means you need to multiply your stake by 14. So let’s say we are doing 1 GBP a point, you will need to place a deposit of 14 GBP.
Now let’s go straight to the calculations. Let’s put this all into a very simple graph.
I have brought to you 4 different scenarios. I will explain one of these more in depth and leave the rest for you to read.
In the spread betting example above, You decide to go long Gold. You are currently at point A in time and Gold is trading at $1,710. You place £1 a point. You will immediately need to deposit £14 pounds, as the deposit factor is 14 * your stake. The value of your trade is £1 * 1710.
Now Gold moves up reaching 1750 and you decide to close your trade selling at 1750. Therefore you have made £1750 – £1710 = 40 points time £1 a point = £40 Profit.
The following example you also take out a long trade but the market moves against you, and instead you loose 40.
The next two examples. You decide to short the market, the first trade goes in your favour the second moves against you.
Short Selling – For those that are unsure what shorting is. The concept is easy but takes a bit of time to grasp. the question many people ask, how do I sell something that I dont own. Think of it this way, you start off by loaning the brokers gold assets. So you go into the market and you sell Gold (that is not yours). When you want to close your trade, you go back to the market and buy gold back and give it back to your broker that has leant you the asset. So I will guide you through the first example.
You decide to want to short Gold, (Hypothetically you borrow it the assets from IG) and you sell it in the market at 1750. Now you are currently at short Gold at point A at $1,750. You have deposited £14 pounds, in order to open the trade, as the deposit factor is 14 * your stake. The value of your trade is £1 * -1750.
Now Gold moves down reaching 1710 and you decide to buy it back and return it to IG. Therefore you close your trade buying it back at 1710. You have made -£1750 + £1710 = 40 points time £1 a point = £40 Profit.
As you can see above you can have 2 different outcomes in 4 different scenarios. Unless your stoploss is hit.
B) Spread Betting Example – calculating your risk.
Now let’s go one step further in trading this commodity product and apply this example to your style of trading or your spread betting strategy. My personal style of spread betting, is I risk just under 1/3 of a day’s movement and try capture about 2/3 to 1 full day’s movement.
Calculating your risk:
1) Know your risk: know how much money you want to risk in any given trade. This will determine the distance of your stop loss.
2) Know your reward: Know where you want to get out of the trade in Profit. This will be your profit taking area.
For this example, we have an account of 2000 GBP and we would like to risk a maximum of 3% and looking for a reward of 6-8%.
We will risk, 60 GBP and we are looking for a profit of 120 – 160 GBP
3) Calculate the average range in Gold.
Here I have attached the average 5 day range of the last two weeks:
As You can see from the average range 5 day range, gold would move on average about 20 USD from bottom to top in a day, before Wednesday. After Wednesday the average 5 day range increased to 37USD. This is because the range on the 29/03 was 105 USD movement in gold, and this has brought the average up. If, instead you look at the range on the 2/03, after the markets calmed down. You can see Gold returned to it’s average 20 USD range. Putting this into our Gold trading example. I would put a stoploss of maximum 6 USD, trying to capture at least 12 USD movement. In this case I am risking 60 GBP in a 6 USD movement, therefore my stake would be around 10 Pounds a point. Let’s look at this in Practical terms:
Practical Terms:
A simple strategy I use is a Price Action Spread betting strategy. I look for the recent peaks or troughs and trade in the direction of the trend with a stoploss respecting my Risk Ratio Reward of 1:2 or 1:3. Looking at the Gold commodity cart below, on the 1/03 Gold had reached a peak of 1724. This was the high of the previous day, and the trend had moved lower after Ben Bernanke’s speech. We now place an order to sell just below the recent high at 1724, with a stop loss at 1730 (6USD distance -respecting the 1/3 day’s movement, and to avoid false break outs of recent highs). Profit target would be recent supports of 1711 or 1706. These numbers fall perfectly within our risk calculations above.
Our stake is 10 GBP a point. This because as we stated earlier 60 GBP is the most we want to risk, our logical stoploss is 6 USD, therefore the stake would be 10 Pounds a point. 60 GBP / 6 points = 10 Pounds a point . If my logical stoploss tells me to place a wider stop, my stake would be smaller. In this Gold continued to trend lower and reached 1712 the target of 12 USD movement x 10 GBP a point = +120 GBP. If it had gone the other way it would have loss –60 GBP.
I hope this brief explanation has helped you understand how to spread bet gold, and applied practically.
For more spread betting strategies in Gold or spread betting example