Gold Trading Strategies: How to Trade Gold on Forex
Gold trading in forex is the speculation of the price of gold in relation to foreign currencies. This trade is particularly made against major currencies such as the US Dollar. It is widely seen as an option for diversification and a reliable forex trading option in times of economic uncertainty in a country. Here, similar to normal forex trade traders use strategies such as technical analysis to predict price movements that are influenced by global shocks as well as internal turbulence in a country.
This forex trading option is not only a reliable trading option but also one that gives high returns. This is primarily due to its high liquidity and the options to have a leveraged position. Having said that, it is not devoid of risks. This requires the need for careful risk management and market analysis strategies.
Learn gold trading online in case you wish to build expertise in this domain. For the time being, here are some effective strategies that will help.
Strategies for Trading Gold in Forex
1.Trend Following
Using tools like moving averages and momentum indicators it is possible to gauge the prevailing trend in the market. Trading in the direction of this trend and capitalizing on sustained price movements is what is known as trend following.
- Bullish Trend: A bullish trend is when the value of gold appreciates. In this trend, the trader might use the temporary dip and profit when the upward trend takes charge.
- Bearish Trend: In this case, the value of gold depreciates. The traders sell assets in the hope that they can be regained in the future with minimal sum.
The trend-following strategy in currency markets is often found to outperform average returns. In his book “Following the Trend”, Andreas Clenow, can be found to demonstrate the effectiveness of trend-following strategies in the financial markets including gold trading forex avenues.
2. Breakout Trading
There is a threshold gold price beyond which it doesn’t usually budge. If the price breakout beyond this level, it means that that boom or dip will continue. Tools such as volume indicators can be leveraged to confirm the breakout. Once the breakout is confirmed with an upward trend, a long position can be taken up in forex trade. In case of a downward trend, a short position is recommended.
A study by Neely, Weller, and Ulrich (2009) titled “The Profitability of Technical Trading Rules in the Foreign Exchange Market” emphasizes the effectiveness of these breakout trading strategies. This 2009 study still holds relevance with statistical data supporting its impacts.
3. Range Trading
In case you learn gold trading online, this is one of the first strategies being taught. It is a method in which gold trading takes place within a range, between a support level (bottom price) and resistance level (Top Price).
It works well in stable markets without strong trends in gold prices. In these markets, the gold price dips once it reaches the resistance level and bounces back once it reaches the support level.
- Support Level: By speculating the chances for gold prices to hike, here you can buy gold.
- Resistance Level: Since there is a chance for gold prices to dip, this strategy demands to selling gold at this point.
According to a study “Do Professional Currency Managers Beat the Benchmark?” made by Pojarliev and Levich, many successful currency managers use range trading techniques.
4. Moving Average Crossover
This is a simple yet effective method to practice and learn gold trading online. The following sections give a ‘how to guide’ to implement this strategy in gold trading in forex.
- Step 1: Choose two moving averages, including one short-term average (Say 5-day moving average) and one long-term average (Say 200-day moving average).
- Step 2: Here is where we identify the cross-overs. There are bullish cross-overs and bearish cross-overs.
In the Bullish cross-over over short-term moving average crosses above the long-term moving average. This points to an upward trend which is a signal to buy gold and take a long position.
Meanwhile, in a bearish crossover where the short-term moving average crosses below the long-term moving average, we get a signal for the downward trend. Here it is advisable to sell gold and enter a short position.
5. Fibonacci Retracement
To implement this strategy a trader must have expertise in Fibonacci retracement tools. In case you don’t have it learn gold trading online to achieve it.
Once this expertise is gained, begin by determining the highest point (peak) and lowest point (trough) of a recent price move in gold. This is to be followed by the application of a Fibonacci retracement tool. It draws lines between the two points and plots key levels based on the Fibonacci sequence.
The Fibonacci sequence which includes 23.6%, 38.2%, 50%, 61.8%, and 78.6% is used to plot these key levels. These key levels are indicators of points where the price of gold might retrace before continuing the trend. In simple terms, this strategy helps to find the points where the price of gold might bounce during a trend.
Thus it helps to make informed gold trading decisions.
6. Sentiment Analysis
Here is another strategy that can mastered once a trader learn gold trading online. In this method, the overall attitude of traders or investors towards gold is analyzed to narrow down to a trading decision. It is generally analyzed based on Commitment of Traders (COT) reports, news, and social media data.
The following steps could be followed to practice this gold trading strategy in forex:
- Begin with gathering information from the above sources. The COT report will also show the position of large traders in the gold market.
- Once such information is collected see if the sentiment is bullish or bearish. The former indicates that most traders have faith in the upsurge of gold prices. This is an indication to buy gold and hold long positions in gold trading. In the latter scenario, the sentiments are toward a downward trend signaling for selling of gold.
7. Hedging Strategy
Risk mitigation strategies are also central to gold trading in forex. Here is one of them. It helps to reduce the risk of price movement in gold and thus prevents potential loss.
To put it simply it is the tactics of the opposite position. That is, if a trader takes a long position by buying gold in a market they may consider the opposite position, which is selling gold, in another market. This is a diversifying strategy that reduces potential losses in gold trading.
However, this method is not as simple as it appears. Learn gold trading online to dive deep into the intricacies of such trading strategies.
So far we have discussed 7 diverse and effective strategies to proceed with gold trading in the forex. More strategies such as carry trade, seasonal trends, and news-based trading are in store for you to learn. Moreover mugging the above-mentioned strategies will not do any good. It requires practical experience to gain results. These are exactly the reasons why you should be considering to learn gold trading online.
In case any clarifications are required on when and where to begin Stewarts Business Academy is here at your service. Reach out to us via phone or email to get further clarification on our offered courses.
