gold and volatility

The new reality for markets: how it affects your trading

Many financial instruments but particularly gold have been experiencing unprecedented volatility since February. This has a variety of knock-on effects for traders, most notably higher spreads than what were previously common and more slippage. There are several different techniques that can be used to reduce the effects of volatility, but first traders should understand some of the factors that have caused this recent period of instability.

During the ‘normal’ circumstances in 2019 and early 2020 before covid-19 started to cause panic in markets, most large traders held diversified portfolios. Many of them had positions and/or holdings in shares, indices, precious metals, other commodities and currencies; some also held cryptocurrencies. The initial waves of panic selling of gold in February and March came primarily as a result of traders and investors selling the metal to cover their positions in other markets.

As the crisis continued, though, volatility for gold decreased somewhat. The Federal Reserve System (‘the Fed’) and various other central banks slashed interest rates and announced record quantitative easing. In other words, they essentially created more money and released this into markets. At first, the lion’s share of the new money went into stock markets, and some indices such as USTEC (the representative CFD based on the Nasdaq 100) and US500 (the same for the S&P 500) made new highs during the ongoing crisis.

It was only later in June when gold started to be affected by a significant inflow of new liquidity. This drove the price up over the next few weeks but also led to volatility because the yellow metal appreciated very sharply. A number of traders considered the gains to be excessive and preferred to sell than buy during conditions of buying saturation.

What these conditions mean

 

Volatility affecting primarily gold has effects for both brokers and traders. In each case, there are measures that can be taken to reduce the effects but not to remove their impact entirely.

Brokers

  1. Liquidity

The first issue being faced by brokers of CFDs on gold is liquidity. Over the last few months, there have been several occasions when it has been difficult to match orders. This happens when the large majority of traders are either buying or selling, making it harder to find corresponding opposite trades to match.

  1. Formation of prices

When there is an unusually large volume of trading and especially when this volume is almost all in one direction, it’s more difficult for a broker to generate and update prices, other things being equal. This is because a significant number and size of new orders in a particular direction can overload the feeds of prices which Exness receives from major banks. It can also be a result of a significant divergence between the prices of spot gold and futures, as was the case in late March:

  1. Gaps

Gaps for gold remain rare, although somewhat less so than in 2019 and before. The main reason for the increased number of gaps is related to the point above on prices; as large volumes come in for a particular direction, prices can ‘jump’ past certain levels so quickly that the movement is not completely reflected on lower timeframes.

Every broker is facing similar issues. However, some are doing better at dealing with them than others. Exness is in general succeeding in handling these problems and minimising their effects on clients. For example, Exness’ spreads for gold have remained consistently low and stable.

Execution in these conditions

The main practical differences to execution that most traders will notice are higher spreadsmore slippage and (for instant execution only) more requotes. In each case, there are some measures that you can take to mitigate the effects on your trading.

  1. Higher spreads

While higher spreads to some degree are basically unavoidable in the circumstances, one way to lower the costs of spreads can be to avoid trading around the most important news. You should also generally try to avoid trading for about half an hour before a market closes and the same after it opens.

Another solution can be to choose the most appropriate account for your strategy. Exness offers four main types of account, each of which features different spreads, being more or less suited to particular strategies and approaches to trading. Based on data from 17 August, let’s take a quick look at the average costs in dollars to trade one standard lot of gold on the four accounts.

Average costs to trade gold-dollar

(XAUUSD)

Type of account

Average spread (pips)

Average cost of spread

Commission

Total average transactional cost (one standard lot)

Standard

30

$30

NIL

$30

Raw Spread

11.3

$11.30

$7

$18.30

Pro

18.8

$18.80

NIL

$18.80

Zero

2

$2

$16

$18

All of the figures, prices and data stated above are for indicative purposes only.

You can evaluate the most appropriate account with the best trading conditions for your strategy from these data. It’s quick and simple to open a new account from your Personal Area, so you can easily experiment with any or all of them to find which is the best fit for you.

  1. More slippage

As with spreads, there’s no way to avoid slippage completely. If you trade with market execution, in other words on any account except Pro, you will almost always face some potential for slippage. When slippage does occur, it can be positive (i.e. in a profitable direction) or extremely small.

During periods of very high volatility, for example around key economic news and data, slippage will usually be higher. One option to avoid high slippage is to avoid trading around these releases. Another is to use pending orders.

Although pending orders can still be subject to occasional slippage, Exness strives to minimise potential slippage for nearly all pending orders executed three hours after the open except in gaps. Our gap level regulation is designed to protect clients in the event that gaps affect your pending orders. This means that placing pending orders which you think will be triggered around critical releases can help you to avoid slippage better than entering manually with market orders.

  1. More requotes

Volatility usually means that prices change more quickly and more unpredictably than usual. For Pro accounts, which use instant execution, this means that you’re likely to see more requotes because the prices you request are more often unavailable in the short time it takes for your order to be sent.

One way of reducing the number of requotes you receive is to set maximum deviation when ordering. If you already do this, consider increasing the number of pips. You can do this through the New Order window in MT4 and MT5:

An alternative option to avoid requotes entirely would be to use an account that features market execution, such as a Zero account, instead of a Pro account.

Upcoming volatility

 

Given the continuation of quantitative easing around the world, record low interest rates in most countries, nervousness in many markets triggered by local spikes in cases of covid-19 and other factors, the current period of volatility for gold and some other instruments is likely to continue.

The highest volatility is generally observed around important releases of economic and similar data, plus crucial news in some cases. For gold, these events include the following, in rough order of importance:

  1. The SIno-American trade deal, especially changes to the review schedule of the first phase
  2. Instability and other events in stock markets
  3. Meetings and press conferences of the Fed and other important central banks, primarily the European Central Bank, the Bank of England, the Bank of Japan, the People’s Bank of China and the Reserve Bank of Australia
  4. Data on employment, most importantly the USA’s non-farm payrolls; to a lesser extent, initial jobless claims
  5. GDP data, primarily from the USA
  6. Inflation, again mainly in the USA
  7. Chinese industrial data (PMI, manufacturing production etc)

Any of these and potentially other important releases can cause very high volatility for gold in the short term. To avoid the highest volatility and the potential accompanying effects on your account, you can avoid trading around these events or otherwise reduce the volumes you trade when they occur.

Exness supporting clients through periods of volatility

 

To stay up to date on all the latest news, check your email regularly and follow Exness on Facebook. By both email and Facebook, Exness gives all our clients regular updates on the most important events in markets that might drive volatility and affect your trading. For more information on how to manage risk, you can also join one of our free webinars. What’s more, Exness Education publishes the latest tips for traders most weeks: these short articles summarise context-specific approaches to managing risk.

If you have any questions about this article or in general, please contact your account manager. We wish you good fortune for the positions to come.

Trading is risky. Excess volatility increases risks further. Be cautious.