Gold-Silver Pairs Trading
Precious metals, Gold and Silver, have very different and distinct investment characteristics. Gold, as a metal, has few industrial uses, and is mainly a monetary asset. Its market condition conveys the value of the global monetary system, since its supply and demand are primarily determined by the condition of the currencies in which it is valued. When gold price rises, it essentially signifies that currencies are being devalued and investors are losing confidence in monetary authorities.
On the other hand, silver is both a monetary and an industrial asset. Hence, it is affected by monetary conditions and changes in the business cycle. Owing to its continuous requirement in industries, its sources are also continuously depleting over time, affecting supplies. But, gold is different, since it is mostly stored after it has been mined.
Trading Mechanism on MetaTrader 4
The first step would be to set up charts in MT4. You will need two indicators, one being the FX Correlator and the other being the overlay chart. You simply need to open MetaTrader 4 and choose “Chart.” Then, the overlay chart will need to be dragged into the open chart window, and default settings need to be specified. After this, click on “OK.”
The FX Correlator has to be then attached to the chart, after which the “Inputs” button has to be clicked on. All the currencies have to be changed to a status of “FALSE,” except those that you wish to trade in. For instance, you might choose the two currencies as USD (US dollar) and AUD (Australian dollar).
After the two indicators can be seen positioned on the chart window, the price of silver and gold will be highlighted on the top overlay chart. You will notice that the correlation or the general trade direction is quite similar. But, there are points along the timeline, where prices differentiate and regress from the trend line. It is these points that usually offer opportunities for making profits.
The FX Correlator calculates the spread between the main chart window and other specified currencies. The two chosen currencies or crosses can be seen highlighted in two differently coloured linear regression points along the timeline.
Continuing from the chosen currencies above, when USD crosses above AUD on the FX Correlator, it is time to long gold and short silver. In the same way, when USD crosses below AUD, it is favourable to short gold and long silver.
The currency pair could be anything apart from the two mentioned, but they should make sense as these do. As a currency, AUD is more susceptible to commodity price movements, while USD is the natural base currency across gold and silver.
For the purpose of risk mitigation, tight stops on both crosses are required. You also need one to calculate the correlation and cointegration of gold and silver, on a daily basis. Trading is generally stalled when cointegration goes below 80%. The position size may not be equal but should be based on underlying value.
Perks of Gold/Silver Pair Trading
This precious metal pair is considered a good trading pair due to its statistically high long-term percentage levels. This pair usually moves in bigger increments than forex currency pairs. The major forex pairs usually have greater tendencies to revert to mean values, and fluctuate lesser in value. Hence, in long-term price movements, gold and silver are preferred over forex pairs.
However, the leverage offered by the gold/silver pair is lower than that of forex currency pairs. The overnight financing charges are also on the higher side, mostly. When it comes to trading pairs, the methods are not foolproof and strict risk management and cointegration retaining have to be implemented.
If you liked this educational article please consult our Risk Disclosure Notice before starting to trade. Trading leveraged products involves a high level of risk. You may lose more than your invested capital.