One of the fundamental aspects that will help you in your quest to tame the silver market and hopefully find a path to profits, is gaining an understanding on how silver behaves in the market compared to other commodities like gold and oil.
Keeping a track on the silver market will be easy when you visit www.MoneyMorning.com/tag/silver-prices, and in terms of knowing how to trade silver, here are some tips and insights that might help you to learn what to watch out for.
Similarities and differences
A good starting point would be to clear up what some investors might assume about trading gold and silver, which is that there is not much difference between trading either of these metals.
It is not that trading silver is completely different to trading gold, but dig below the surface, and you will soon see that there are subtle differences as well as similarities. You may be confused by these similarities and differences at first glance, but if you remember the two key aspects that set them apart and how these influence the way silver behaves in relation to gold, then you are on the right path to trading the silver market with a higher degree of confidence.
Be prepared for greater volatility
The first key aspect that is immediately noticeable when you compare price movements of silver and gold, is just how volatile silver is in comparison to gold.
The basic reason for the greater level of volatility in silver markets when compared to trading gold, is liquidity.
What you get when liquidity levels are lower is a situation where smaller amounts of money traded can have a sharper influence on prices and cause the price to move with greater volatility.
These smaller amounts of money can still be in the billions, but even so, this still often pales into relative insignificance in comparison to gold markets, where trading volumes are often much higher and deeper.
The reason why this is significant and needs to be understood when trading silver markets, is that you need to adjust stop losses accordingly, otherwise a spike in volatility could bounce you out of a trade and trigger a sale which could cost you money unnecessarily.
An important ratio
The other important dynamic that you will need to be aware of if you are going to get a good handle on trading silver markets, is that the gold and silver ratio is arguably one of the most important ratios to pay attention to when looking at commodities overall.
The simple reason why this data is such a useful tool is down to the fact that the ratio between gold and silver prices tends to move in identifiable cycles.
You will often find that when the ratio hits a cyclical low point, silver often becomes relatively inexpensive when compared to gold. Conversely, at a cyclical high point, you can often find that silver has a tendency to underperform gold in this scenario.
The significance of this pattern is clear. Watch the ratios and you get some decent clues about the momentum for the silver price, allowing you to place a trade accordingly.
Reading beyond the headlines
If you are a regular reader of newspapers and financial publications in general, you can’t have failed to notice that even when things seems to be ticking along nicely in the economy, there often seems to be a fair amount of doom and gloom in the headlines you are digesting.
Although it would not be unreasonable to expect the media to inject some positivity into their column inches , psychology plays its part in what sells newspapers and what doesn’t. This means that a headline telling tales of a virtual financial meltdown will invariably prompt higher newspaper sales than a headline telling is that everything is good in the world of finance and in general.
The point about this, is that if you learn to read beyond the headlines and digest the information that really matters, there is every chance that you could profit from an element of fear and panic that might hit some investors when they read certain stories, especially if it involves a stock or sector that they are invested in.
Fear, panic, doom and gloom, all spell trouble for certain markets, but the positive slant to consider is that more often than not, these headlines might just create an opportunity for a profitable trade.
If you find that silver futures have taken a dive in response to negative headlines, but the fundamentals suggest that this is an overreaction and that the price is looking oversold, this may well be the time to step in.
If you have the right knowledge and outlook about trading a commodity such as silver, there is every chance that you can successfully adopt the role of ringmaster and tame the silver market.
Alisha Dyer works in the world of investment banks (she’s a good person, honestly!). She uses her experience to teach those just starting out what to do, and what not to do.