One of the questions we hear most often is, “What does it take to be a successful trader?” Although many people look for the Holy Grail of trading that works every time, history has shown it likely doesn’t exist. Instead, George Gero, precious metals strategist, vice president, global futures, RBC Capital Markets, says nothing in life is free or easy, so you have to be prepared to work if you want to be a successful trader.
Here, Gero shares the checklist of information he reviews every day before he even considers a metals trade. A checklist is important, he says, because it can keep you focused in the heat of trading when an economic report, political action or anything else hits the market. As such, here are the 10 things Gero checks every day.
1. Do your homework
If you want to do well during the trading session, you have to set yourself up for success before the bell even rings, Gero says. That means taking time the night before to check prices and see how the metals are trading overseas in reaction to the U.S. trading session.
Gero says he tends to look at prices around 8 p.m.-11 p.m. ET, focusing specifically on the metals prices and the major currencies — metals because that is what he intends to trade and currencies because they can affect the price directly (see “Footing the bill,”). “If I see that the dollar is strong, then that could affect the prices of the metal as being too expensive in dollar terms,” he says.
Based on the trading day, the Asian markets are the first to open and first to react to any news that breaks when they are open. As such, Gero makes checking gold prices at the Tokyo Commodity Exchange (Tocom) and the Shanghai Futures Exchange a priority the night before and first thing in the morning. These exchanges also trade other metals, such as platinum at Tocom, but he focuses mainly on the gold price.
Additionally, he looks to see how much volume the exchanges saw overnight because that can be a further indication of what to expect in the day’s trading. He gets all of this information by visiting the exchanges’ websites at www.tocom.or.jp and www.shfe.com.cn.
3. Business as usual in the United States and Europe
Nothing moves the markets like a good (or bad) economic report. As such, knowing what reports or economic events are due to hit the airwaves that day, week or even month is of paramount importance, Gero says, because they could affect either industrial or retail demand. A list of upcoming economic reports and key stock earnings reports is published weekly on FuturesMag.com.
Although there are a number of reports and meetings he watches for, Gero says the monthly nonfarm payroll report (available at www.bls.gov/ces), released the first Friday of the month, is one he pays particular attention to simply because of its possible impact on monetary policy at the Federal Reserve. “The Fed has set a target of 6.5% unemployment, which essentially would mean the end of the [stimulus] punchbowl,” he says.
4. Politics in the U.S. and Eurozone
Just as economic reports can have an effect on markets, political actions and statements can move markets. Gero gave the example of Group of Seven (G7) and Group of 20 (G20) meetings as having the potential to move markets, especially because currency exchange rates have become an important topic at those meetings. Although he says nothing of significance has come out of those meetings lately, the potential to impact markets remains.
In addition to scheduled political events like the G7 and G20 meetings, Gero also says it is important to keep your ear to the ground for any unexpected political events, such as last year’s Arab Spring or the sovereign debt crisis that continues to wrack Europe.
To keep track of these sorts of events, Gero says he constantly is scanning headlines for any news that may affect the metals markets, and when he sees something of note is when he digs deeper into the story. “Cyprus was a headline; Greece was more than a headline; the fiscal cliff was a headline,” he says.
5. Politics and threats in the Middle East
The Middle East continues to be a geopolitical hot spot. Because of the region’s abundance of oil, traders need to pay attention to what is happening in that part of the world. Gero says metals traders also need to consider the price of oil in their analysis because it can be a bellwether of the perceived strength or weakness in the economy, or a gauge of the possibility of war breaking out in the Middle East.
All of these factors are important because they can affect gold’s perceived need as a safe haven. “If you have political turmoil or they are blowing up pipelines for example, that could have an effect on gold because it’s going to have an effect on crude oil,” he says. “It’s a matter of safe haven demand for gold.”
6. Saber-rattling in North Korea
Speaking of the possibility of war, North Korea is at the top of the list of countries Gero is watching. Because war can create a definite sense of uneasiness, especially with the economy, he says any sort of saber-rattling has the potential to move markets. “It’s a matter of whether people would start to buy and hoard gold because they would have fears of unrest,” he says. “It’s the perception more than anything else, especially the perception of how the United States is reacting.”
Although North Korea is the main country he is watching now, that is subject to change should political unrest develop somewhere else in the world. But unrest alone does not mean a move in gold; last year’s Arab Spring or the current unrest in Syria, haven’t significantly affected gold, Gero says.
7. Taxes and demand in the jewel of the Orient
India is important because it is one of the largest consumers of gold, along with the United States and China. As the Indian economy has emerged over the last decade, the populace has turned to gold as an important investment option. Also, gold, in the form of jewelry, always has seen high demand in the country during certain seasons, particularly the wedding season in late summer through the fall.
As such, any talk of raising taxes on gold imports can have an impact on physical demand for the metal in the country. “When India passed the tax on gold, the shops were not selling for a while. So it affected physical demand,” Gero says.
8. Interesting, very open interest(ing)
Only now does Gero turn to charts to add technical analysis to what he already has done. “The fundamentals make the charts; the charts don’t make the fundamentals,” he says.
Open interest is important to Gero because it is an indicator of the type of business taking place. If there is large open interest, then that indicates new business coming into the markets; whereas lower open interest indicates that people are closing out contracts, which means less liquidity.
Liquidity is key because it is what large funds are looking for. “Liquidity is very important in the market because the more liquid it is, the more it attracts interest from funds rather than retail interest,” he says. “It attracts the big players that really can move the markets.”
9. Getting technical with it
In addition to open interest, Gero also looks at volume, 200- and 50-day moving averages and highs and lows. Generally, he looks at these as a whole to infer whether the market is in an uptrend or downtrend. “When you have higher moving averages, higher closes, higher volumes and higher open interest, it attracts funds and momentum buyers,” Gero says. “On the other hand, when you have lower open interest, lower volume, lower moving averages and prices, it attracts liquidation. Those are bullish or bearish signals.”
10. Look to the future
Finally, Gero watches for any price discrepancies between the front-month contract and the one after it. If he sees buying in the spread, that is a bullish indicator; whereas no buying is a bearish indicator. Although he watches the spread every time the contract rolls over, the December-February roll is the one he monitors most closely.
In addition to news sources like The Wall Street Journal, Bloomberg and Dow Jones, Gero also makes it a point to watch and read market commentaries produced by many of the brokers and others. “You never know how helpful the commentary will be, but you have to know if Goldman is bullish,” he says. “You have to know if HSBC, Credit Suisse or anybody else recently downgraded their view on gold.”
Profitable trading is anything but a simple affair. As Gero has shared, there are a number of things that affect every trade decision he makes. Having a checklist of important data to study established before considering any trade ultimately can help ensure you at least are making an informed trade.