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A - TRADING FUTURES
Buying to profit from an
expected price increase (Going Long)
Someone expecting the
price of gold to increase over a given period of time, can seek to
profit by buying futures contracts. If correct in forecasting the
direction and timing of the price change, the futures contract can later
be sold for the higher price, thereby yielding a profit. If the price
declines rather than increases, the trade will result in a loss. Because
of leverage, the gain or loss may be greater than the initial margin
deposit. |
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For example, assume it is
now January, the July gold futures contract is presently quoted at
$296/oz, and over the coming months you expect the price to increase.
You decide to buy a contract of one lot by putting a deposit (margin) of
$1000.Further assume that by April the July gold futures price has risen
to $303/oz and you decide to take your profit by selling. |
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Since each contract is for 100 oz
, your $7.00/oz profit would be 100 oz x $7.00 or $700. Suppose however, that
rather than rising to $303/oz, the July gold futures price had declined to
$294/oz and that, in order to avoid the possibility of further loss, you elect
to sell the contract at that price. On 100 oz your $2.00/oz loss would thus come
to $200.
Selling to profit from an expected
price decrease (Going Short)
Going short is, instead of buying
a futures contract, you first sell a futures contract at a higher price in the
hope that you will buy another contract at a later stage at a lower price thus
realizing profit (or loss in case prices move in the other direction).
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For example, assume that
in January you have indications that the price of gold will decrease
over the next several months. In the hope of profiting, you sell one
contract of April gold at a price of, say $275/oz. If by March , the
price has declined to $267, an offsetting futures
contract can be |
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purchased at this price,
realizing a gain of $8.00/oz making a total profit of $800 (
$8.00x100oz). A loss would be realized if the price has moved in the
opposite direction . |
B - TRADING SPOT
If the client wishes to speculate
on gold believing that gold price will strengthen
(going long),
then the client will buy
an (X) number of contracts of gold (each contract being 100 oz) say at $275/oz.
This trade is called
(opening buy).
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If the gold price
appreciates and the client wishes to close the position when the quote
is $283/oz, then the client will
sell
the contract/s of gold at this price
(closing sell).
The profit that results from this trade is calculated by subtracting the
purchase price
from the selling
price and
multiplying it by the size of the trade
(profit/loss calculation). |
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Selling price-Purchase Price x
Size of Trade= Profit/Loss
$283-$275x100oz=USD 800 Profit
If the price of gold moves in the opposite direction then loss will be incurred.
If the client wishes to speculate on gold believing that the price of gold will
weaken then the client needs to sell gold, and say sell at a price of $282 /oz
(going short) (opening
sell).
If the price goes down to $272/oz and the client decides to buy the gold
(closing buy) thus realizing a profit of $10/oz i.e $10x100 oz a profit of
$1,000 . If the price moves in the opposite direction then a loss instead of
profit will be incurred.
Forex Trading Model
Trading Futures
Trading Stock Indices |
