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Gold trading strategies
2020-09-15 • Updated
Information is not investment advice
The gold trading is not a very easy topic, as the yellow metal does not move the same way as the other commodities or the currency pairs on the Forex market. However, there are some well-known strategies which can be used to succeed in gold trading.
Besides the usual statistics, gold is affected by political and economic factors, global disasters, terrorist attacks, and crises. The reason is that gold has tight connections with different markets: equity or raw materials.
The dynamics of gold prices do not follow the usual logic. Trading on the news can be successful only after the major releases or events. It is highly recommended not to open the position immediately after the event, because you do not know where the price will go. For example, the sharp fall in the equity market results in the rise of the gold price. As a result, you can make long positions.
Fundamental trading strategy: correlations
It’s not a secret gold has a strong negative correlation with the US dollar. That means, gold and the US dollar move in the opposite direction. The buy signal for gold means the sell signal for the USD and vice versa. A good thing to know is that one of the forms ahead of the other one and you can take a chance to make a profit.
Here is the strategy to trade the Gold using its correlation with the USD.
- At first, open gold’s price chart and the USD cross currency pair (for example, USD/JPY) on your platform at the same time. Both of the charts are needed to be set at the same timeframe (for example, H1).
- Secondly, determine the key support and resistance levels on both of the charts and wait for the breakouts. In addition, take a look at the forms of the candlestick to find out the potential further direction of the price.
Take a note, that sometimes you can find a resistance line on the USD/JPY chart, but cannot determine any visible support on the gold chart. However, the breakout of the resistance on USD/JPY chart will be followed by a sell signal on the Gold chart. Therefore, if the USD is strong on USD/JPY, it will signal to sell the gold.
On the H1 chart of USD/JPY, a bearish candlestick was formed. It gave a strong signal to buy gold. If a trader takes this opportunity, he can make a good profit on the rising price of gold.
On the other hand, gold has a positive correlation with AUD/USD. Australia is known as one of the largest gold producers in the world. That is why the Reserve bank of Australia should keep its gold reserves in balance. The gold reacts to Australian fundamental data or monetary policy changes made by the Reserve bank of Australia. On the picture below, the interest rate cuts made in 2016 resulted in the selling of the gold.
Seasonal trading strategy
The price movements of gold are correlated with its seasonal pattern. Gold can be stronger during certain times of the year and weaker during the other times. Moreover, these periods repeat themselves during the same parts of the year. Gold tends to go up in the first quarter of the year as well as during the last months of the year.
- The first step is to buy gold in the months when Gold price tends to increase. It tends to happen at the beginning of the year (in January and February).
- Wait for the other confirmations, based on technical figures, oscillators (MACD, RSI) and forms of candlesticks for the potential reversal.
- If the gold is following its seasonal pattern in January, make a long position.
- Take profits before the end of February. Remember, if gold has followed its seasonal pattern in first months, the seasonal cycle will likely to continue. According to the seasonal pattern, March is the worst month for trading gold, so it is better to close your position before it.
Tip: the spot price for gold displayed in the charts is set around 10:30 and 15:00 GMT after different auctions made by the major players in the gold industry. Most of the traders open or close their position during this period. That is why it is recommended to trade gold within these time limits.
The specific nature of gold asks for the special trading techniques to be used. You can use either the correlation strategy or the strategy of seasonal changes. But remember to take into account all of the factors, which can potentially influence gold. This will prevent you from risks and make your trading more profitable.
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