How to Trade Gold

Gold trading is not an easy topic, as the yellow metal does not move the same way as other commodities or currency pairs on the forex market. However, there are some well-known strategies that can help you succeed in gold trading.

News trading

Besides the usual statistics, gold is affected by political and economic factors, global disasters, terrorist attacks, and crises. This is because gold has tight connections with different equity and raw materials markets.

The dynamics of gold prices do not follow the usual logic. Trading on the news can only be successful after major releases or events. It is highly recommended that you do not open positions immediately after the event, because you do not know where the price will go.

For example, a sharp fall in the equity market results in the rise of gold’s price. This can help you make long positions.

Fundamental trading strategy: correlations

It’s no secret that gold has a strong negative correlation with the US dollar. That means gold and the US dollar move in opposite directions. A buy signal for gold means a sell signal for the USD, and vice versa. A good thing to know is that one of these signals forms ahead of the other one, allowing you to make a potential profit if you’re willing to take a chance.

Here is the strategy for trading gold using its correlation with the USD.

Open the gold price chart and the USD cross-currency pair (for example, USDJPY) on your platform at the same time. Both of the charts need to be set to the same timeframe (for example, H1).
Determine the key support and resistance levels on both of the charts and wait for breakouts. In addition, take a look at candlestick forms to find out the potential further direction of the price.

Sometimes, you see a resistance line on the USDJPY chart, but cannot discern any support on the gold chart. Note that the breakout of the resistance on the USDJPY chart will be followed by a sell signal on the gold chart. Therefore, if the USD is strong on USDJPY, it will signal to sell the gold.

On an H1 USDJPY chart, a bearish candlestick has formed. It gives a strong signal to buy gold. If a trader takes this opportunity, they can make a good profit on the rising price of gold.

On the other hand, gold has a positive correlation with the AUDUSD. Australia is known as one of the largest gold producers in the world. That is why the Reserve Bank of Australia has to keep its gold reserves in balance. The gold reacts to Australian fundamental data or monetary policy changes made by the Reserve Bank of Australia. In 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 follow a seasonal pattern. Gold can be stronger during certain times of the year and weaker during other times. 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’s price tends to increase. This 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 a 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 the first months, the seasonal cycle is 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 major players in the gold industry. Most of the traders open or close their position during this period. This is the time period within which it’s recommended that you trade gold.

Summary

The specific nature of gold requires 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 the price of gold. This will protect you from risk and make your trading more profitable.

Share with friends:

Open an FBS account

By registering, you accept FBS Customer Agreement conditions and FBS Privacy Policy and assume all risks inherent with trading operations on the world financial markets.