Silver Trading on Forex | Top Strategies to Trade XAG/USD
The COVID-19 pandemic and political tension between the U.S. and China has caused the price per ounce of silver on the Forex market to rise over 200% between March and October 2020. Anybody can get a hang of this situation since numerous investors buy precious metals and the demand for protective assets is constantly increasing.
According to Bloomberg, the Forex silver/U.S. dollar ratio has not yet reached a historical maximum but has already broken the record of 7 years ago. As of 10/28/20, the price of the "moon metal" is $24.51 and continues to rise.
This situation shows that trading silver can bring considerable profits if one can foresee correctly the quotations at the market of precious metals. What are the strategies for silver trading at the exchange and how to use them successfully? Join me to discover how you should proceed.
Historical overview of silver trading
To fully appreciate the specifics of gold and silver trading, we shall start with the basics. Silver (argentum in Latin) has been viewed as a precious commodity since the 4th millennium BC. The reason it is so widespread is that silver is often found in its native form and does not need to be smelted from ore.
Since the early Middle Ages, this metal has been used mostly for coinage, jewelry, and utensils. But with the development of technology, its role has expanded dramatically, and it is now used in the manufacture of mirrors, electroplating metal parts, and electrical appliances. Today silver has a unique status, acting as both a precious and industrial metal. That explains why it has such a high, stable silver price on the Forex market, and why it is considered a defensive asset.
This metal is the third most popular raw material asset after oil and gold. However, if you think about trading silver futures, you should cognize that the liquidity of this metal is not superfluous. The reason is that it is several times inferior to gold. On the other hand, the trading volume is generally sufficient to implement any strategy during any timeframe.
In this century, the "moon metal" began experiencing a huge uptrend, and in the period from 2011 to 2013, there was a sharp correction. Approximately the same perturbations were observed with gold, but the "big brother" was not on the brink of a collapse. During this period the price of silver on the Forex fell from $50 to $14-15, and only then did it manage to level off and go into a flat (sideways) trend.
The current trends are as follows:
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Overall, silver has been rising steadily in recent years, and there is no reason to think that this long-term trend will change.
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Nevertheless, the potential of explosive movement in this metal is low, it is several times inferior to the potential of gold.
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There is a certain correlation between gold and silver, these metals are usually subject to the same trends.
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It means that if gold goes down shortly, the "little brother" is sure to repeat this downfall.
General information regarding silver trading on the Forex market
The XAG designation is how silver is labeled on the Forex and its most popular pairing is XAG/USD. The asset is traded in the soi-disant troy ounces, where one troy ounce is equal to 31.1034768 grams. The futures contracts in most cases contain 100 units of the trading instrument. So, for example, if the price of an ounce of silver on Forex is $14, then a futures contract would be worth $1400.
Since it’s comfortable to trade on Forex in split lots, the trader can buy/sell just one troy ounce. And here it is important to note that currency pairs in Forex do not have tickers (abbreviations), instead, international codes are used (EUR, USD, etc). Precious metals have tickers, but silver can be written not only by the code XAG. Another designation of silver on Forex is SILV. This ticker is commonly used by many brokers in their trading terminals.
Because the "moon metal" experiences constantly high volatility, it often allows traders to employ aggressive strategies to achieve large profits via moderate costs. And given silver’s constant dependence on gold and the general trends in the commodity market, the movement of quotations is predicted quite successfully.
Factors affecting silver quotes
No special license for silver trading is required. The activities of properly regulated brokers who work officially are regulated by the relevant control authorities and are free to put their traders' transactions on the interbank market for precious metals. There are no special requirements, restrictions, or conditions. This partly explains why precious metals are traded quite often, although mainly by experienced traders.
Among the factors that determine the position of silver on the Forex market is the production rate. In other words, the volume of rough that is produced by countries that are its main suppliers in the world market. The nuance is that often producing companies are also involved in several precious metals. One such Colossus that works with silver and gold is the Polymetal Corporation.
The main producers of raw materials in the world are:
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Germany
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Spain
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Peru
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Chile
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Mexico
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China
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Canada
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USA
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Australia
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Poland
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Russia
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Kazakhstan
Precious metals have become consolidated in the hands of only a few companies, as well as the relative synchronism of their quotes, can be explained by common output capacity and similar industries (for example, gold is also actively used in electrical engineering).
In addition to the technical indicators for silver trading, there are seasonal trends, too. As a rule, these trends affect only precious metals and do not influence — or only minimally influence — the quotations of other instruments. An illustrative example is the wedding season in India, which traditionally begins in December and ends in March. During this period, there is a high demand for jewelry in India, which leads to an increase in precious metal prices on the world stock exchange. This is not a joke. This is a proverb well known to any professional trader working with metals.
Therefore, it is easy to explain the rise in silver prices on the Forex market during the Indian wedding season.
Massive buying of jewelry in one of the most populous regions of the world leads to a significant shortage of jewelry. The resulting vacuum is easier to fill with silver because it is cheaper than gold. And while gold is rising, the growth of the market value of silver is also accelerating.
Silver trading on Forex also depends on major economic and political events, but here the trader additionally has to take into consideration other areas. For example, the appearance of new methods of silver mining, breakthroughs in the field of inorganic chemistry, new players entering the mining market, bankruptcies of concerns engaged in the development of ores, etc. All these events are nonessential for those who trade in currency pairs, but they are of paramount importance to traders of precious metals.
Peculiarities of silver trading in Forex | Basic indicators and forecasting
Trading the popular silver/dollar pair on Forex gravitates towards holding pending stop orders and corrections. The norm for this asset is to take down the risk control and then within a day return 2-3%. This means that the precious metal is not suitable for those who have never worked with the commodities market. It is better to practice with oil and gold because silver requires at least minimal skills and knowledge of the specifics of the market base in this segment.
When an asset enters a stable sideways movement, one of the best indicators to trade silver is the RSI (Relative Strength Index). The RSI was created by the famous financial theorist W. Wilder in 1978 — it is still perfectly applied to the commodities market. However, the RSI is not the only indicator that is useful for trading silver, because the MACD (Moving Average Convergence/Divergence) and SMA (Simple Moving Average) are also useful. They are discussed in more detail below.
Traders who work with precious metals often use the Price Channel (PC), which is a classical representative of the Envelope group. It can be used to trade silver by counter-trend strategy.
An important point that often scares traders when they decide to trade silver. On the 15-minute timeframe, you are guaranteed to see a lack of liquidity in this instrument, but on the hour timeframe, you will find the work to be comfortable.
Moon metal is traded within quotes on Forex, futures, and options. However, regardless of the market, you should always put wide stops on it. This is necessary to avoid getting into what is known as a saw. A saw is a situation in which the change in depo from stop orders exceeds the change from directional trades.
A striking example of silver trading in Forex
The easiest way to trade silver and gold is through binary options. Virtually any broker provides the appropriate functionality in their trading platform. You need to choose the precious metal you are interested in, enter the amount of investment, see the forecast and compare it to your analysis.
An option is a futures market instrument, so it is open for a certain period. Therefore, it is necessary to set the time when the option will stop working. By that time, the price per ounce of silver on the Forex will change, our task is to predict how exactly it will change, whether it will rise or fall compared to its current value.
What else to bear in mind when trading silver
Silver quotes on Forex can change by 60-70% during a year. For most national currencies this figure is no more than 20%. These are the typical conditions including the world crises. In general, most commodity market assets are characterized by long 10-15-year trends. This means that trading in precious metals, given a lucky forecast, may assume not only a short- and medium-term, but also a long-term strategy.
To date, more than 50% of mined silver goes to industry, and this trend is growing, which means that in the future jewelry production will be less of a priority for the designated metal. The primary reason is that it has been actively used in medicine and meteorology. This change prompted many countries to modernize the development of existing deposits and production technology, and China in the past couple of years has surpassed Australia, Canada, and the United States in this indicator.
In a wave of general production decline, which is typical in crisis situations, industry goals and interests can seriously affect silver quotes on the Forex market. The basic trend is a decrease in the number of consumers, which will inevitably make the goods cheaper. It is hard to make an example of silver itself, so let's turn to oil, the leader of the commodities industry.
The collapse of the quotes for oil can be easily explained by the decreasing number of consumers on the background of the progressive increase in the number of producers represented by the shale oil rigs. Of course, there were other significant factors as well.
Silver trading on Forex is estimated by experts as working with the instrument of the second echelon — namely, after oil and gold, when they are already involved in the main strategies. Now there are no or almost no brokers, who focus on this precious metal, however, many traders use it as an additional instrument — for example, for the simplest diversification within the framework of assets division. This gives an understanding of the real purpose of this instrument.
Basic silver trading strategies
Silver trading strategies on Forex have significant differences from strategies that are used for currency pairs. We have described it above. Now we will give some examples of basic strategies successfully used by experienced traders for many years in relation to the XAG/USD pair (hence, the metal is bought for U.S. dollars).
Silver trading using the Puria method
The Puria method is a trading system based on two types of indicators, the already mentioned MACD and MA (moving average). Since there are only two indicators, their tracking and analysis are relatively simple, so the strategy is a real catch for beginners of the segment (however, it is still worth working with gold first, if you want to connect to the commodities market). Most trading terminals (like MT4) have these indicators by default which makes prediction even easier.
The basis of this Forex silver trading strategy is the tracking of three moving averages. A pair of slides is given a red color on the chart and their periods are 75 and 85. These slips are used for low-type prices. The third moving average is orange with a period of 8, which is used for close prices.
The moment to make a buy trade is when the orange moving average crosses with red ones from bottom to top, and the MACD indicator shows one bar above zero levels. When the orange moving average crosses two red ones from top to bottom, the trade can be closed. When the MACD shows one bar below zero and the orange moving average crosses two red ones from top to bottom it is time to open a sell trade. It’s important to close when the orange line goes up.
Typically, the silver Forex trading strategy is according to the method Puria used in the time frame H1 (less frequently - H30). It should be taken into account that trades on the precious metal can hold at the same level for several days — this allows the trader to go to a qualitative profit and significantly strengthen their positions. However, the strategy does not cancel out the general rules for entering a transaction — it is necessary to calculate all the parameters from the beginning, assessing the ratio of risks to the expected result.
Silver trading based on the SMA indicator
The silver trading strategy in Forex with the simple moving average indicator is based on three moving averages, which will work by the simple method for close prices. The lines on the chart have the following colors and periods: green 5, blue 3, orange 8. The moment to open a buy trade is when the orange line is directed upwards and crosses the other two lines. When the orange line crosses the blue and green lines from above downwards — this is the moment to close a position.
According to this strategy, silver is set to sell when the orange slides cross the blue and green from top to bottom. And when the slides cross again, it is a signal to stop the trade. Note that the strategy using the SMA indicator and the Puria method can be used individually or combined as part of a deposit acceleration strategy.
Other silver trading strategies in Forex
It is possible to trade using Volume Spread Analysis (VSA). It is a common method of chart analysis in trading, which not only allows effective tracking of the market situation but also analyzing the activity of other market participants. VSA allows you to estimate the trading volume of precious metals and to duplicate the trades of other players.
VSA Based Strategy
Often VSA patterns are effectively supplemented by the Price Action method developed by Charles Dow, the founder of technical analysis. The idea of PA is that the price contains everything necessary, reflecting the full range of events and phenomena of economic as well as political criteria. The advantage of this strategy is that the process of developing is not time-consuming (about 15 minutes with experience) and is suitable for intraday trading. For example:
Silver trading strategy based on PA:
Lower highs and lower lows reveal a downward trend.
Upper highs and upper lows indicate an upward trend.
Signals are caught at key levels if trend peaks predictably update tops and troughs on the chart.
The order opens at the moment when the trend reversal is completed and a price pattern is visually detected.
A pattern in traders' terminology is a predictable price movement. Any strategy is based on the detection of patterns — when the trader can say with maximum certainty that the price will move in the direction he wants. He opens a deal in accordance with the price movement and when he sees the price pattern changes, he closes it. This rule applies to any assets.
FAQs
When should one start trading silver on Forex?
We recommend that beginners start with currency pairs. Even experienced traders rarely use silver as their main asset. However, it can be a source of additional profit and is often used for diversifying the risks of the main deals.
What influences silver quotations?
Mainly it is the amount of production of raw materials, as well as the number of producers. Demand can change seasonally (for example, during the wedding season in India) or in response to a crisis — when investors tend to invest in protective assets (which are often raw materials).
What are the peculiarities of silver trading?
The "moon metal" is quite volatile. Quotes can change significantly (up to 70% per year). In addition to tracking the major political and economic news, it is necessary to follow the market of raw materials and news from the world of chemistry and jewelry.
What are the strategies for trading silver?
Traditional strategies used for currency pairs are not suitable for precious metals. However, a trader still uses RSI, SMA, MACD, and other asset indicators. It is possible to trade based on these indicators, the Puria method, combine them, and develop your strategies.
Glossary for novice traders
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Trading
Trading involves the act of buying and selling financial assets like stocks, currencies, or commodities with the intention of profiting from market price fluctuations. Traders employ various strategies, analysis techniques, and risk management practices to make informed decisions and optimize their chances of success in the financial markets.
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Broker
A broker is a legal entity or individual that performs as an intermediary when making trades in the financial markets. Private investors cannot trade without a broker, since only brokers can execute trades on the exchanges.
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Volatility
Volatility refers to the degree of variation or fluctuation in the price or value of a financial asset, such as stocks, bonds, or cryptocurrencies, over a period of time. Higher volatility indicates that an asset's price is experiencing more significant and rapid price swings, while lower volatility suggests relatively stable and gradual price movements.
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Index
Index in trading is the measure of the performance of a group of stocks, which can include the assets and securities in it.
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Investor
An investor is an individual, who invests money in an asset with the expectation that its value would appreciate in the future. The asset can be anything, including a bond, debenture, mutual fund, equity, gold, silver, exchange-traded funds (ETFs), and real-estate property.
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Team that worked on the article
Chinmay Soni is a financial analyst with more than 5 years of experience in working with stocks, Forex, derivatives, and other assets. As a founder of a boutique research firm and an active researcher, he covers various industries and fields, providing insights backed by statistical data. He is also an educator in the field of finance and technology.
As an author for Traders Union, he contributes his deep analytical insights on various topics, taking into account various aspects.
Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).