8 Tips for Trading Gold (XAU/USD)
As forex traders seek out stable investments that can hedge against inflation, market instability, and other geopolitical factors, gold has become more popular than ever. Traders can use gold as a way to hedge against other investments or as a safe haven that provides consistency over time and is more resistant to dramatic swings in valuation than a majority of other currencies.
What Is Gold Trading?
XAU/USD is one of a number of gold pairings offered by forex brokers, making it easier than ever to incorporate gold as part of your forex trading strategy. The stability of gold prices over time also makes it an important asset during inflationary periods.
Following the impact of the COVID-19 pandemic on the global economy, foreign governments and savvy forex traders have moved more of their money into gold as a safeguard against losses resulting from current inflation. Economic practices such as printing more money can weaken global currencies, depreciating their value in relation to stable assets such as gold.
Forex vs. Gold Trading
Because trading gold is known to be stable in shaky economic times, it’s considered a favorite among traders who want to protect themselves from a volatile market or inflation.
The Value of Gold
When it comes to capital and commodities, gold is considered one of the most popular precious metals to invest in. Why? Gold can help investors diversify their portfolios, which is especially important during times of economic uncertainty.
What Factors Move Gold Prices?
What can impact the price of gold? Trading activity, economic inflation, supply, and demand are major factors that can impact the price of gold.
What Are Gold Futures?
Futures contracts are legally binding contracts that are bought and sold on exchanges. A buyer purchases a certain amount of a commodity at a predetermined price on a specific date, while the seller agrees to let the asset go under those predetermined conditions.
What Are Gold Options?
Gold options are derivatives that utilize gold or gold futures contracts as underlying assets. This type of contract is a contract between two separate parties to simplify a possible transaction on a certain amount of gold.
How Do I Get Started Trading Gold?
If you’re eager to make better use of gold and capitalize on potential profit opportunities, here are nine trading tips to keep in mind:-
1. Day trade with the New York close in mind.
Gold is a nearly 24-hour market, but peak liquidity is typically found during New York trading hours. Whether you should target trades during or after New York trading hours depends on your goals. Trades during peak activity offer high liquidity and low volatility, making them good targets for safe-haven positions.
2. 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.
Gold is a relatively stable asset, making it likely to reach these previous highs or lows over time. However, this isn’t a good strategy for day trading because it can take time for these targets to be hit. Range-bound strategies typically don’t offer quick profit opportunities like momentum strategies do.
3. When trading gold, consider geopolitical implications on currencies.
When political or economic uncertainty creates concerns about currency prices, gold can be a stable safe haven that protects your liquid assets.
Gold tends to be strongly correlated to the U.S. dollar as well as other stable currencies such as Japan’s yen, and opening a position with XAU/USD can be a reliable means of protecting your assets from unpredictable situations affecting other forex markets.
4. 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 the 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.
5. Track industrial and commercial demand for gold.
Increased market demand for gold can affect prices due to the fixed global supply of the material. Demand can come in multiple forms. Certain industries may increase their acquisitions of gold due to the material’s role in consumer projects. Both the medical and tech industries, for example, use gold in certain products and solutions.
6. Monitor central bank buying.
Central banks tend to buy gold as a hedge when they’re anticipating volatility in certain currencies. Recently, for example, China and Russia made headlines for making significant investments in gold, which reflected their concern about the future price of the U.S. dollar and the euro, among other major global currencies.
7. Track real interest rates.
Gold has a well-documented correlation with real interest rates, with prices rising as interest rates decline and prices dropping as interest rates rise. The real interest rate is determined by subtracting the inflation rate from the nominal interest rate, resulting in a percentage gain or loss that takes inflation into account.
Historically, gold prices tend to rise when the real interest rate dips below 1%. By watching this interest rate as it changes over time, you can identify a strong buying opportunity—especially if you’re looking for long-term trading opportunities.
8. Target moving average crossovers.
Because gold prices tend to fluctuate within a range, they will cause different moving averages to cross over on forex charts. Many traders will buy whenever a shorter-term moving average crosses a longer-term moving average. For example, if a 20-day moving average were to cross the price point for the 50-day moving average, it would signal a buying opportunity for long-term traders.