Because of a distinct position in the global economy and political systems, the gold market provides high liquidity and best opportunities to generate profit. But several traders often fail to take advantage of price fluctuations as they have not learned the unique characteristics of global gold markets or the obstacles that can slash profits.

Gold trading is not for every investor as it requires skill sets to understand the markets. Anyhow, start learning how to trade the commodity in four steps.

Determine What Makes Gold Tick

One of the world’s oldest currencies reacts only to some price catalysts, including inflation and deflation, supply and demand, and greed and fear. Each factor influences sentiment, volume, and trend intensity.

Market participants face greater risk when they trade the yellow metal in reaction to one polarity when another is controlling price action. Combinations of these forces show up in world markets, creating long-term themes trailing equally long uptrends and downtrends.

Know the Crowd

Almost everyone has a say about gold; hence, diverse interests. These long-term players are rarely deterred by downtrends rattling ideological players. Almost the entire population of gold bugs are comprised of retail traders. Gold bugs collect physical gold and allocate an enormous portion of family assets to gold equities, options, and futures.

Gold bugs bolster liquidity and keep a floor under futures and gold stocks simultaneously due to continuous supply of buying interest at lower prices. Also, gold attracts hefty hedging activity by institutions who purchase and sell combined with currencies and bonds in bilateral techniques called risk-on and risk-off.

Study Long-term Chart

Examine the gold chart, beginning with long-term history that goes back at least 100 years. The commodity, which has recorded trends that lasted for decades, has also glided lower for longer periods.

For instance, the metal exhibited minimal movement until the 1970s, when it escalated in a long uptrend, underpinned by rising inflation because of higher oil prices at that time. In the early 1980s, gold inched lower in response to the Federal Reserve’s monetary policy. The subsequent downtrend prevailed until late 1990s when gold recorded the historic uptrend which ended in the 2011 high.

Decide on the Right Venue

Many exchanges have product offerings linked to gold. Remember, liquidity trails gold trends. It increases when it is moving higher or lower sharply, and decreasing during calm periods. This movement affects the futures markets to a greater extent unlike in equity markets.

The Chicago Mercantile Exchange offers three primary gold futures: 100-oz contract, 50-oz mini contract, and 10-oz micro contract added in September 2011. The biggest contract traded near 200,000 lots a day this year, but the smaller ones were not widely traded, which has influenced trade execution in short-term positions.

Market Vectors Gold Miners ETF watches greater daily percentage movement than the SPDR Gold Shares, but entails higher risk as correlation with gold can differ. Huge mining companies hedge aggressively against price fluctuations, reducing the impact of spot and futures prices.

GLD exhibits the greatest participation in all kinds of markets, as tight spreads can be as lower as one penny. As of September 2015, the average daily volume is at 5.39 million shares a day. CBOE options on GLD proffer another liquid alternative, with active participation retaining spreads at low levels.