The Newest Go-to Gold Trade

02/29/2012 2:30 pm EST

Focus: COMMODITIES

NADEX offers a gold spread product that is an ideal vehicle for traders to capitalize on short-term price swings in the gold market, says Darrell Martin, explaining how to trade it.

All eyes seems to be on gold lately, and our guest today is Darrell Martin to talk about a gold trade idea that we can look at going forwards. So Darrell, talk about the gold trade right now. 

There are obviously a lot of options when it comes to gold trades. You can trade gold using futures, you can trade them using ETFs, and for a short-term gold trader, because there is a huge amount of volatility in gold, there is a new product out on the spreads.

It’s a spread product called the NADEX Gold Spread, and if you use that product, it 100% defines your risk, so you can get in and out of gold, but you don’t have to worry about if it goes ten or 20 points against you. You’re not going to lose more than your maximum risk and you actually put your maximum risk in up front.

One day, it may be a great time to go short gold, and the next day may be a great time to go long gold. You’re getting in and out and going both directions on gold right now because that’s the only thing you can do. It’s not really flying up like it was before; it’s just bouncing back and forth. It’s finding some sort of product that has limited risk but still lets you capture the majority of the movement on a daily basis. 

And this gold new product, is it a futures product, or what is it?

It’s really a futures options product. It’s brand new on the NADEX exchange. They are regulated by the Commodity Futures Trading Commission (CFTC) and they offer what’s called binaries and they call them bull spreads. 

See related: Limit Risk with Binary Options

If you sell the bull spread, it’s actually bearish, but either way you could trade gold. You can trade any of the index products out there, but it’s a perfect vehicle for trading gold. 

What kinds of things are you looking at in terms of gold and finding opportunities? Is it technical, is it fundamental news, what is it for you?

Anytime there is any kind of big bond issue coming out, anytime they’re voting on anything regarding currency, those are great times to trade gold because if people get scared, obviously, they’re going to start buying gold like crazy because they think currency is going to be devalued. 

If they’re starting to feel safe—for that day or that week with the way things go now—that’s a great time, of course, to be shorting gold. It’s going to be devalued at that point. 

So, right now I’m looking at technical set-ups and I’m always looking at moving averages. There are a lot of different things you can look at, but I keep it really simple, look at the news, see what’s happening, and that’s when you know gold is going to move. 

What is the favorite moving average that you like to use?

You’re going to throw the standard 200-day moving average on there, but of course, if you want to get some timely trades, I’m going to go to the breakdown on the intraday trading and I’m going to be looking at probably about 15-minute to five-minute bars on gold, and then what I’ll do is break that down a little bit further using like a 20-day moving average. 

How much size do you typically put on based on what you see on the charts or in the news?

The size is always going to be dependent upon the risk, so how much risk I am taking. If I’m risking, say, $1000 on a trade, then of course I’ve got to find the risk on this position and where I’m going to get in and where I’d get out if I’m going to take a loss. 

Even if my risk is $100, then, of course, that’s ten contracts. There are just different things like that you can do.

Finally, is there anything outside of gold that you use as a leading indicator or something that correlates really well that you trade alongside gold?

You can always look at the Treasuries; that’s a great thing to look at, the US Treasury notes. You can trade those also on the spreads, so there are a lot of different products that you can use to trade in correlation with gold.

The S&P, a lot of times it goes inverse, but lately, sometimes gold and the S&P go down and go up together and then they invert back and forth, so you can spread them as well. 

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