Best Gold Trading Strategies Part 2

Technical analysis for gold is no different to that of any other market and uses the historic price graph to identify past patterns that point to future trends. 

The key way to ensure the accuracy of any technical analysis conducted on the gold price is to confirm your findings by carrying out the same analysis of other gold-related securities, such as mining stocks or gold ETFs, which often move in line with the price of gold. 

A match across multiple analyses can give investors confidence behind any uptrends or downtrends that have been identified.

The most basic level of technical analysis demands investors identify previous highs and lows as well as any obvious trendlines or chart patterns.

Below we go through some of the technical analysis tools that investors can use to examine the gold price and other gold-related securities:

Gold trading strategies: moving averages

For traders with a short-term perspective, one of the most widely used methods of examining the gold price is using moving averages and a crossover strategy. 

This involves identifying the average movements in the price over a short and long period of time and treating the two passing one another as a signal to buy or sell. Moving averages are explained in more detail below:

• Moving averages: the moving average aims to smooth out historic price data, calculating the average price over a certain period of time. 

For example, the 20-day moving average is the average rate over 20 days, and is recalculated each day. On day 21, the first day is dropped from the calculation. 

This allows traders to look how the current rate compares to the average, which will filter out any sudden or unexplained movements that could distort the historic price data.

• Moving average convergence divergence (MACD): this takes the moving average over a short timeframe and an average over a longer timeframe. 

Traders look for when the short-term moving average crosses over with the long-term average. If the short-term moving average surpasses the longer-term average then it generally suggests that prices are heading higher.
 

Gold trading strategies: pivot points

Pivot points help isolate the price at which sentiment in market is likely to change. 

Calculating the pivot point is done by simply averaging out the high, low and closing price of any given security. Although gold is constantly traded many will still coincide closing prices with when their preferred stock market closes. 

This pivot point is then used the following day to signal what mood the market is in. 

If the price of gold is rising above the calculated pivot point from the previous day then it suggests a bullish attitude, and higher prices in play while there is a drop below the pivot point implies the opposite.

Pivot points are often used as part of wider analysis of where the support and resistance levels are. 

If the calculated pivot point is lower than the spot price of gold then it is deemed supportive for gold prices while one below the spot price acts as the level of resistance.

There are numerous tools used to help calculate pivot points in the market, including:

• Fibonacci retracement: this tool helps identify when to enter and exit trades using the ‘golden ratio’, which help find areas of support and resistance in the gold price. 

This is calculated by six levels that will result in significant price moves: the highest point (100%), lowest point (0%), the midpoint (50%) and then three levels lying between them at 61.8%, 38.2% and 23.6%. These should be the points where support or resistance increases.

• Elliot wave: this tool centres on the theory that every action is followed by a reaction, and that every impulsive move in the market is countered by a corrective one. 

The idea is that the psychology of traders and the tendency to follow wider trends results in trading that produces waves on the gold chart and that, after five waves, a larger impulsive wave appears before a three-wave corrective phase. 

 

The first five waves form the impulsive wave, moving in the direction of the main trend. The subsequent three waves provide the corrective waves. The use of corrective waves can involve the cross-study of Fibonacci retracements.

 

Simplify Analysis by Targeting Previous Highs and Lows

Because XAU/USD tends to trade in a range, one of the easiest strategies is to identify buy or sell opportunities within previous highs and lows for the trading pair. 

Traders can open a position on gold when it’s trending up, for example, and target a previous high as their sell price, or vice versa.

Because gold is a relatively stable asset, it’s likely to reach these previous highs or lows over time. 

Note that this isn’t a good strategy for day trading, because it can take time for these targets to be hit, and range-bound strategies typically don’t offer quick profit opportunities like momentum strategies do. 

Still, it’s a relatively low-risk strategy designed to generate some profit off reliable XAU/USD price movement.

Use the Symmetrical Triangle for Analysis

The symmetrical triangle is a simple chart pattern that indicates a period of consolidation that may lead to a price breakout. 

Symmetrical triangles feature the convergence of two trend lines progressing at a similar slope, but in opposite directions. 

As consolidation takes place, price movement on the pairing grows tighter, creating a potential trading opportunity on a breakout.

Most traders use the symmetrical triangle pattern along with other technical indicators, such as liquidity or relative strength index. 

When other indicators suggest a potential price breakout, the symmetrical triangle can add further confirmation and increase confidence in placing an order on XAU/USD. 

A stop-loss order can be placed just below the descending trend line after the two trend lines converge, and sell orders can be issued in the event that the price of XAU/USD successfully breaks out.

Gold trading strategies: other technical indicators

There are other technical tools that can be used by gold investors to calculate other factors in order to help predict where the future price is headed. 

Some measure the momentum behind any trends that have emerged, others evaluate the level of volatility in the market.
Below are some of the notable technical indicators used to trade gold:

• Relative strength index (RSI): this index is an indicator of momentum that compares the average gain made when prices have risen over a set period of time, for 14 days as an example, compared to the average losses made in the same period. This provides an idea of whether gold is set to become overvalued or undervalued in the near future.
• Stochastics: the stochastic oscillator also helps gauge the momentum behind the price. The theory behind stochastics is that prices that have been trading in an uptrend throughout the day usually settle at the upper end of that day’s price range, and those experiencing a downtrend will close the day at the lower end of the range. Operating within a range of 0-100, a reading below 20 signals an oversold market while one above 80 shows signs of a market that is overbought. This is often used in conjunction with the RSI.
• Average true range (ATR): ATR measures the volatility of a trend but does not identify trends itself. ATR is a type of moving average that compares the highs and lows of gold over a set period of time with the most recent closing price, producing the ‘true range’ for the five most recent trading days, which is then averaged out to produce the ATR.
• Bollinger bands: this is a helpful analysis to identify when sentiment and prices will change direction within a range-bound market. This identifies three important levels that put the current price into perspective: the trendline (where it is heading now), the upper line (where resistance will be met), and the lower line (where support will kick in). These three levels provide a range in which to trade in to help signal where the turning points are.

All of these indicators are used in other markets such as forex.

Trend Trading Gold

Gold is a commodity, prone to strong price movements. It is well known that one of the best trading strategies for commodities is to trade breakouts in the direction of the long-term trend. 

Let’s check the historical data and see how well trend trading Gold has worked using two different methods.

The first strategy involves trading breakouts. Let’s say that when the monthly closing price of Gold is the highest it has been in six months, that is a bullish breakout and we would take a long trade. Conversely, when the monthly closing price is the lowest it has been in 6 months, that is a bearish breakout and we would take a short trade. I will call this “Breakout Strategy”.

The second strategy is also a trend trading strategy, but less of a breakout strategy: it enters long when a monthly close is higher than the closing price six months ago, or short where lower. I will call this “Higher/Lower Strategy”.

Let’s see how a back test of this strategy would have performed since 1976, assuming every trade was held for one month and then exited.

Both strategies have performed positively over almost half a century, in both long and short trades, with the breakout strategy performing considerably better. 

It seems clear that the best technical trading strategy for Gold is to trade 6-month price breakouts, and that trading with the 6-month trend even when the price is not making new highs or lows has also worked quite well.

These back-test results are very strong. It is not easy to find a trading strategy which would have performed as well as this over the same period using typical Forex currency pairs, which is a good reason why you should trade Gold if you are going to trade Forex.

Don’t forget that Forex / CFD brokers will usually charge you a fee to keep a trade open overnight if you do not have an Islamic account. 

When you are trend trading and holding trades for weeks or months, this can eat away at the profit of your trade. 

This is a reason why you might want to trade with the trend but exit the trade after it stops going in your favor for a few days, or even day trade Gold in the direction of the trend. 

When day traders close their trades before 5pm New York time, they pay no overnight swap fees.

One way to try to time entries to exploit the multi-month trend is to wait for some kind of retracement on a shorter time frame such as the daily time frame, and then when a new day closes in the direction of the trend and makes a higher close than the closes of the last two days in an uptrend, for example, you have a shorter-term entry signal to use.

How to Day Trade Gold

Gold is very suitable for day traders. One advantage in day trading Gold is avoiding the cost of overnight swaps, which can be relatively large at many Gold brokers. 

The main disadvantage is that the spread plus commission for trading Gold is higher than in the major Forex currency pairs, but this is compensated for by the higher average price movement in Gold.

Gold day traders are best advised to trade with the longer-term trend:

• If the price is HIGHER than it has been for the past 6 months, be STRONGLY BULLISH
• If the price is HIGHER than it was 6 months ago but BELOW some of the prices reached since then, be WEAKLY BULLISH
• If the price is LOWER than it has been for the past 6 months, be STRONGLY BEARISH
• If the price is LOWER than it was 6 months ago but ABOVE some of the prices reached since then, be WEAKLY BEARISH
• If the price has shown little direction over the past 6 months, trade REVERSALS at obvious areas of support or resistance

Gold day traders should use shorter time frames to fine-tune entries in line with the above points.

When is the Best Time to Trade Gold?

The price of Gold tends to move more at certain times of the day. Day traders should try to day trade Gold during these more volatile times to take advantage of the increased price movement.

Best Time of Day to Trade Gold

The data show that the price of Gold tends to move the most on average between Noon and 8pm London time, roughly corresponding to the hours when markets are open in eastern and central U.S.A. 

This suggests that the best time of day to trade Gold, whether as Gold options, Gold futures, spot Gold, or XAU/USD is from Noon to 8pm London time. This is probably true because the major Gold market opening times are within this period.

Conclusion:

• It is worthwhile trading Gold as its price moves a lot and often trends strongly.
• Almost every Forex broker offers Gold trading.
• Trade with the 6-month trend. New 6-month breakouts are best.
• Enter on a price breakout or a pullback following the breakout.
• Fundamental analysis can be used to determine which technical analysis signals are more likely to perform better.
• Take profit on winning trades by using some type of trailing stop.
• Beware of overnight swap fees if you hope to keep a trade open for more than a couple of days.
• Always use a hard stop loss based upon the value of the ATR indicator. Tight stops such as half of the daily ATR tend to give good results.
• If the U.S. Dollar Index is trending up, you may feel more confident in taking short trades in Gold priced in U.S. Dollars; if trending down, you may feel more confident in long trades.