Gold can be traded in many ways, but the purchase of physical gold is the oldest. However, the increasing speed of financial exchanges and the emergence of technology have opened up new trading opportunities for precious metals, including gold. The gold derivatives market, represented by the symbol XAUUSD on the Forex market, is the most common way to profit from the fluctuations in gold prices. This article will introduce you to the basic concepts of gold trading.
As we all know, financial markets trade instruments on a lot basis. A standard lot in currency pairs equals 100,000 units of the base currency. The volume of a lot in gold CFD trading is slightly different. The unit of gold trading on global markets is the ounce, and one standard lot of gold is equivalent to 100 ounces. In other words, one ounce of gold equals a standard 0.01 lot, the lowest tradable unit within gold.
A tick is the smallest measure of metal CFDs price change in the forex market. When you look at the gold CFD price in the Market Watch window or on the chart space in the MetaTrader platform, you see that the price is calculated to two decimal places. The second decimal place indicates the tick or unit of change in the price. Hence, in gold, a tick is equal to 0.01.
So, one tick equates to one cent ($0.01) per ounce. That means if a trader buys one ounce of gold (standard 0.01 lots) at $1,800 and the price rises by $1 (to $1,801), he has gained $1 or 100 ticks.
In other words:
1 ounce (equivalent to 0.01 standard gold lot) * 100 (ticks) = 100 cents or $1
Simply put, by multiplying the minimum trade size by the tick unit, we can calculate the tick value as well:
1 ounce gold (equivalent to 0.01 lot of gold standard) * 0.01 (tick unit) = 0.01 dollars or 1 cent
Imagine a trader opens a 0.25 lot gold buying position at $ 1815.30. This will be the trading volume, in ounces:
Trading volume in ounce = lot size * 100
Trading volume in ounce = 0.25 * 100 = 25 ounces
A tick value is determined based on the following formula, which is used for this position:
Trading volume in ounce * 0.01 (tick unit) = value of each tick in US dollar (Quote currency)
25 (trading volume) * 0.01 (gold tick unit) = $0.25 or 25 cents
The tick value for this trade is 25 cents, meaning if the price goes up 1 tick, our trader earns 25 cents.
Assuming that the trader closes his position at 1815.85, that will result in a profit of 55 ticks:
Profit (loss) in terms of tick = Price at the time of closing the position - Price at the time of opening the position
Profit in terms of ticks = 1815.80 - 1815.30 = 0.50 (which we call 55 ticks.)
A trader's Profit, in this case, is 12 dollars and 50 cents based on the volume of 0.25 lots in this trade, which is calculated as follows:
Trading volume in lots * Change in tick = Profit (loss) in dollars
0.25 * 50 = $12.50
Trading volume in ounces * Change in the price of an ounce = Profit (loss) in dollars
25 ounces * $0.50 = $12.50
Details of the gold CFD can be found on the Inveslo website Online Trading section > Spot Metals > gold-silver-trading page
View changes in gold prices on the MetaTrader platform. MetaTrader 4 and 5 display the gold symbol with AXUUDS and measure the price based on the value of one ounce and up to two digits after the point. A tick is therefore calculated as a one-cent change in price.