Gold trading strategy forex

Two Ways to Trade Gold.

by Walker England.

Article Summary: Gold continues to consolidate after its $375 decline. Price now offers two ways to trade using a symmetrical triangle pattern.

Fast moving markets are known to have periods of consolidation after the conclusion of a strong move. Thus is the case with Gold (XAU/USD) seen below after a sharp $375.81 decline. These periods may come in many forms on your chart, but one of the most recognizable patterns of consolidation is the symmetrical triangle. These charting patterns occur when current levels of support and resistance are seen converging on our chart. With this in mind we will further examine the price of gold, and identify two ways to trade symmetrical triangles .

Learn Forex –Gold Daily Triangle.

(Created using FXCM’s Marketscope 2.0 charts)

The firs t method of trading a symmetrical triangle is to wait for price to breakout from current levels of support and resistance . This can be useful for gold traders that s don’t have to have a clear opinion of future market direction . Traders can trade a breakout in either direciton by setting up an OCO order . Traders can plan to sell a break of support and trade the pair to new lows under . $1 . 338.06. At the same time traders can look to buy a price break above resistance on a breakout to a new high above $1,423.71 . In the event that price moves back inside the triangle Stop orders can be placed on both entries in the center of the triangle pattern, to limit risk exposure in the event of a false breakout.

Learn Forex –Gold Breakout Strategy.

(Created using FXCM’s Marketscope 2.0 charts)

The second method of trading a triangle is a simple strategy designed to trade between the outlined levels of support and resistance that make up our charting pattern. Again using our example on gold, this time pictured on a 4 hour chart, we can see price approaching the upper boundary of our triangle that is currently action as a line of overhe3ad resistance. Traders looking to trade the interior of a triangle may consider setting entries to sell gold at this point. Likewise if price dips to support traders can repeat the process and set entries to buy. Once entry orders are set, stops should then be placed outside of either support or resistance. In the event that price breaks from these predefined levels traders should exit any existing positions and begin looking for new opportunities.

Learn Forex –Gold Retracement Strategy.

(Created using FXCM’s Marketscope 2.0 charts)

Regardless of where price action ends up on gold, identifying a symmetrical triangle can allow traders to choose from a variety of trading strategies. Remember, the key for trading triangles is to first identify levels of support and resistance. Then, traders can set their risk and manage positions until the pattern concludes.

---Written by Walker England, Trading Instructor.

To contact Walker, instructordailyfx . Follow me on Twitter at WEnglandFX.

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A Holistic Approach To Trading Gold.

Since the beginning of time, gold has had a special place in history. It has been used to build religious idols, settle political differences, honor monarchs, demonstrate affection, serve as currency and, more recently, has been used for commercial processes. Until 1971, the U. S. dollar was backed by gold, which is still held by central banks around the world for use in times of emergency. It also holds promise for traders - if they can find the trend in this often volatile commodity.

Following the removal of the gold standard for currencies, gold prices skyrocketed 2,200% in U. S. dollar terms over the next nine years, peaking briefly above $800 in 1980. It then spent the next 19 years in a bear market, dropping as low as $260 in 1999 before starting its next long-term rally. However, thanks to an easing of currency restrictions following the last recession, the Fed is facing increasing challenges.

The effective Fed funds rate was above 6% in early January 2001, but by early 2004, the rate had fallen more than 80% to 1% and the Fed did not start increasing the rate again until June 2004, more than a year after the rally had begun. The Fed has taken a much more accommodative stance on rates, which continued through 2007. A weak dollar and rocketing commodity prices during this year are the evidence of this: gold again surpassed $800 in 2007 and gold reached well above $1800 dollars an ounce in 2011 (after the financial crisis). Although we'll never know how high a new peak will be until it's behind us, increasing volatility appears to be the modern gold reality.

A Method for Trading Gold.

Another powerful trading tool, known as divergence, involves looking for situations when the price of an asset and an indicator move in opposite directions. As you can see from the chart below, the numbers 1 through 3 signal areas with positive divergences (in green) and negative divergences (in red). Another good way of further confirming signal strength is to look for support or breach of trendlines (dashed blue lines).

The challenge for the short-term trader as well as the buy-and-hold gold bug, is finding tools to help determine when to buy and sell.

Let's look at a few other technical and fundamental ideas to help prevent you from getting overwhelmed by the emotions that accompany this highly volatile precious metal.

Moving averages have become a popular trading tool because they are simple to use and easy to generate in most charting programs. The idea is to buy when the shorter term, faster moving average crosses above the slower one and to sell when the faster average crosses below the slower average. This works great in a trending market but not so well in range-bound markets. The trick is in knowing what type of market you're in. Because markets trend about one-third of the time on average, relying on moving averages as your primary tool can become quite costly. This is where trendlines can help.

RSI is an oscillator that measures price momentum. It is also very useful in showing divergences with price. As Figure 1 shows, the RSI often hits extreme highs and lows at gold's price turning points. For example, with the first red circle on the chart, the RSI hit an extreme as gold hit its 2006 peak around $725.

Looking at the concept of divergence in Figure 1 (above), note the differences between the RSI and price. As the first green lines on both shows, the second low in the RSI was higher than the first low, while the second price low was lower than the first. This warns the trader that buying power is building. Sure enough, a rally followed. Red lines at Point 2 show an example of negative divergence.

Fundamental and Intermarket Considerations.

It is important to note that gold prices have rallied nearly every time the dollar has dropped (see Figure 3). When gold rallies, oil usually rallies along with it.

Economic strength and interest rates are two other important fundamental/intermarket considerations. A strong economy engenders confidence in domestic markets, increasing their attractiveness to foreigners who need to purchase U. S. dollars to buy stocks or other American assets. That is good for the strength of the dollar. Rising interest rates have a similar impact. The higher the interest rate earned by a Treasury or corporate bond, the more investors these instruments will attract and the better it is for the dollar.

Putting it all Together.

When you compare Figures 2 and 3, the U. S. dollar had also started to rally just before gold peaked in 2006, and the Fed fund's rate had risen from a low of 1% to 5.25%, which would be good for the dollar and bad for gold. As a result, traders were left with three good technical and two fundamental/intermarket reasons to sell gold.

Next, the RSI dropped to an extreme low before recovering, warning of a possible trend change. This was confirmed by a moving average crossover buy signal (Figure 1, Point B). A short-term trendline was also broken (not shown). Looking at Figures 2 and 3, the dollar had hit a peak and was dropping again - a good sign for stronger gold prices.

The Bottom Line.

As long as gold fundamentals are intact and intermarket relationships are strong, stay the course. Here is the beauty in this approach: if these factors change significantly, it will often be accompanied by a technical sell signal such as a trendline break. As you get better at the gold trading game, you will develop a feel for the process so that you'll be ready to execute when the time comes.

Gold Trading Strategy.

Gold Trading according Elliott Wave.

Qualities 1.

Honesty with yourself.

Qualities 2.

Be patient and wait.

Qualities 3.

Principles and discipline.

Qualities 4.

Control greed and fear.

Qualities 5.

Remove emotions from trading.

Qualities 6.

Calm feels waves.

Qualities 7.

Not catch peaks catch the bottom.

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Gold Trading.

With a forex platform, it has become very easy to invest in gold electronically using the same mechanism that one employs to invest in currency pairs.

Almost all platforms today offer the pair XAU/USD, and the only restriction is that gold can only be traded with respect to the US dollar, because gold trading is priced in US dollars as is trading in oil.

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For example, some exchanges do limit the amount of time one can remain in a trade and the trading times for the use of this pair according to some limitations imposed by the London Gold Exchange, which is the where the world’s gold gets traded .

But, increasingly, it’s possible to trade the pair just like any other, 24 hours a day. Check your platform for details.

As with all trades you make on the platform, online trading with gold does not require the “ physical ” purchase or sale of the real material. You do not purchase gold that you can hold.

You do make use of the international Over-the-Counter exchange created by the London Gold market, and the clearing and settlement facilities they make available, but you will not be aware of all this . You will clear your trades just as you always do.

Trading in gold is a question of understanding the sentiment on the gold market. The price of gold is volatile; it goes up and down according to how investors feel .

For example, when the crisis started in Ukraine, traders became frightened, fled to gold, and the price went up 2.3 per cent to US$1,351.6 an ounce .

That happens whenever there is a big catastrophe, a war, or anything that frightens investors, and they take their funds out of stocks and bonds and buy gold, either gold funds, or the metal itself .

The financial crisis of 2007-2009 made investors nervous and many bought physical gold, pushing the price way up to over USD 2000 an ounce for a while. Then the clouds dissipated over the global economy, and investors pulled their money back out of gold into more productive investments. The price of gold went back down to nearly USD 1000 an ounce in 2013.

And this is the problem with investing in gold. As the great guru of American investing Warren Buffett once said:

“Why invest in gold? You put it in your safe. It sits there and does nothing. If you buy an ounce of gold today and you hold it at hundred years, you can go to it every day and fondle it and a hundred years from now, you’ll have one ounce of gold and it won’t have done anything for you in between. You buy 100 acres of farm land and it will produce for you every year. You could buy the Dow Jones Industrial Average for 66 at the start of 1900. At the end of the century, it was 11,400, and you would also have been given dividends for a hundred years. So a decent productive asset will kill an unproductive asset.”

This is, of course, an extreme view from an active investor, but it is true that performing investments are easier to judge than gold . There is, of course, some demand for gold for making jewellery, and, in China and India, consumers consider buying gold as an absolute necessity, an essential part of domestic security. Consumers in China and India show the greatest demand for gold in the world, and when they buy, they do have a certain effect on the price of the metal.

But you can see how this plays out in a report from the World Gold Council . Consumer demand for gold rose 21 percent in 2013 as appetite for jewellery, small bars and coins hit an historic high of 3,863.5 tons. This was largely on the back of demand from China and India. Jewellery demand was at its highest since the onset of the financial crisis in 2008, coming in at 2,209.5 tons. This showed an increase of 17 percent from the previous year. The demand was fuelled in part by the fact that the price of gold was lower in 2013 than in the previous year.

And investors -- still worried about security -- kept up demand for bars and coins, which surged to an all-time high of 1,654 tons, valued at USD 75.0 billion.

With all of that, overall demand for gold dropped 15 percent in 2013. Investors were, in general, not so ‘risk-off’ as the financial world calls it, and so they put their money back into stocks and bonds.

Gold performed worse than almost any other asset, despite all the demand from consumers in China and India. Nothing could make it plainer: It’s very difficult to know what gold is going to do and when. The one time you are likely to be sure about investing in gold is when all hell breaks loose: a war, an earthquake, a financial crisis. Whatever shakes people up makes gold go up.

In other times, it’s probably wise to steer clear of gold. Of course, there is a forecast. Nomura Securities has raised its 2014 gold price forecast to USD 1,335 per ounce for 2014 from the previous USD 1,138 per ounce as, the Nomura analyst explains,

“ the speed of last year’s price decline brings forward the start of the next cycle .”

“Gold appears set to recover like a phoenix regenerating from its ashes,” the Nomura analyst forecasts.

Several major investment banks, including Japan’s Nomura, Switzerland’s UBS and London’s RBC Capital Markets have all recently raised their gold price forecasts. UBS now expects the price of gold to average USD1,300 per ounce this year while RBC has set an average of USD 1,400 per ounce. For 2015, Nomura predicts a gold price of USD 1,460 per ounce.

Gold has already risen by around 12 percent this year, partly as a result of the US Federal Reserve announcing that it would slow down its policy of “ quantitative easing ,” or intervention in bond markets and easy liquidity .

For the day trader, in the midst of all this uncertainty, a technical approach to gold/dollar is perhaps the safest. Short-term changes in the XAU/USD pair are perhaps best understood in terms of pullbacks and breakouts.

Certainly one should keep an eye on fundamentals, but watch resistance and support floor carefully as well .

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