Journal Note on 12/1/2010:
Kind of changed this system up, by making my entry points more time-dependent than price-dependent. Also, just going long after taking a bath on shorts, but stepping up the size just a bit after taking a closer look at back-testing and risk tolerance.
Current standing:
+34.84% since 11/1/2009
Had I simply stuck with my original buy-only strategy and not played the shorts, I'd be up well over 100%. It is what it is. I made the call at some point to liquidate those positions at a loss because I realized I have much higher risk tolerance for losing positions on long positions than short ones. I believe that I will ultimately see gains on long positions whereas I wasn't nearly as confident that the same is true on shorts. Should have probably realized that earlier, but I was sticking to my thoughts that I'd see a large retrace down. As the world continues to implode, I'm less comfortable that the old rules apply. Which probably means they do and someone else will make money shorting this market, but I am just not comfortable with the assumption at this point.
So, anyway, here's the parts of the roller-coaster ride of the trading:
11/1/2009 - 7/31/2010: +89.71%
8/1/2010 - 10/17/2010 (the date at which point I ceased the short strategy and liquidated positions): -34.35%
10/18/2010 - 11/30/2010: +8.27%
What I'm doing now is, rather than buy in at a particular drop in price, I have a few rules in place where I only check in at one or two particular times each day and compare that to the price a day earlier. If price has dropped by a certain percentage I buy. If not, I don't. Then I just wait until the next check-in time. Once I buy, I wait 24 hours and if it's up a certain percentage I close. If not, I hold. I do have a target price where I will sell on a rapid spike upward, but that's the one exception to the rule.
It basically accomplishes most of what I tried to accomplish before, except it reduces the need to monitor things even more. My total positions are reduced, so to compensate I adjusted my position size up a bit so it puts me at the same general risk level as before.
The ups and downs are part of trading, and you deal with it and move on. The goal is to make money in the long-term and not dwell on the losses other than try to learn from them. Many people don't like the risk and the swings that can occur. I probably wouldn't either on funds that I'm counting on for retirement or savings. This is on money I can afford to experiment with.
Response to a question on 12/1 regading commissions:
Results are net of commissions.
I trade on the Forex market (XAUUSD pair) through FXDD. Not all brokers offer gold trading via Forex.
The "commission" is the spread on the trade. Right now, the spread is $0.51 per ounce. The moment I buy in at $1389.01 I could close it at $1388.50, and that's the extent of my transaction costs. The broker pockets the $0.51 on that initial transaction, but there aren't additional costs to close the trade. There are some small rollover/holding charges that come into play if you hold it for a long period of time. That amounts to roughly one penny per ounce per week.
Margin to control one ounce is 2% of price. So I don't need to tie up $1388 to get in, I only need to tie up $27.76. However, you need to make sure you have enough money to absorb drops in price, because it's marked to market every day. 2% is the current standard for most pairs. There are a few currency pairs requiring 5% ["exotic" pairs, such as USDMXN or USDTRY (Turkish Lira)].
One ounce is 0.01 "lots", which is a micro-lot. Not all brokers will allow trading at those levels, they may require at least a mini-lot (0.1 lots, or 10 oz at a time). Seriously, unless you have at least $15,000 to play with you should not be trading mini-lots.
The platform I use to trade with is MetaTrader 4. There are others, but this one works fine for the simple trading I do, so I don't know much about them. I actually like MT4 because you can act as though you are trading into and then out of a particular transaction. In reality, trading rules are such that you have to trade First-in, First-Out. You end up in the same spot if you do it right, but it's much easier to think about trading the way I do it by following each individual transaction as its own buy/close.
There are other ways of trading gold, or to proxy it. Others here have discussed their preferences. I love Forex because it's 24 hours per day 5 days a week, it's instantaneous entry/exit at low transaction cost. Others feel differently. One thing I like about the Forex account is that, if I so choose, I can get into some other currency pairs. At times, I've entered into trades where there has been a huge spike simply based on initial reaction to some news report. I usually stick with gold, but I'll take an occasional shot elsewhere here and there.
Response on 12/1 to questions on counter-party risk, Oanda, and the margin requirement
Yes, you need to make sure you are dealing with a reputable broker. There are some decent forums (Forex Factory and Forex Strategies Revealed are good places to start) where there are a lot of traders who can offer guidance on finding one. FXDD is sizeable and has a good history, but I don't make recommendations to anyone other than do your own research. That said, if I ever reached a point where I had enough money to actually get nervous about things, I'd split it among two or more brokers and just execute the same trades. It would be a little more hassle, but it would spread the risk of the kinds of issues you're talking about.
Oanda is a trading platform, I believe, and not the broker. It's the software you download in order to execute your trades. I've never used it.
As for how much capital you need to hold in order to trade microlots, it depends on your desired strategy. The given strategy I laid out, I'd start with a minimum of $1500, just to be safe for those unusual market conditions where it's dropping and you need to buy in on a number of consecutive days. But you could start with a smaller amount and just decide not to trade nearly as much.
In perspective, do you believe gold will drop $500 in rapid enough fashion where you wouldn't be able to add funds to your account? If the answer is no, then you could start with $500 and just try trading a single microlot. But you are losing flexibility going this small. It also depends on the broker. Some require a minimum starting amount.
Yes, 2% margin is the same as 50:1 leverage.