Gold Trading: Strategies to Trade it Profitably

Since time in memorial, gold has played an important role in the financial market. It has been synonymous with luxury and power. In the past, it used to make religious idols, honor monarchs and serve as currency. In the United States, the dollar was pegged to gold until 1971 when this peg was removed.

To date, the Federal Reserve and other central banks around the world hold huge deposits of gold for emergency purposes. After the great depression, the Roosevelt administration fixed the price of gold at $35/ounce. This was removed by the Nixon administration in 1971 leading to a 2,200% gain in its price resting at $800 before going down to $260 in 1999.

After this fall, gold began a bull run and is today trading at $1,136. These fluctuations are very important for traders who can make a lot of money in the process.

In this article, We will explain a few strategies to help you trade gold spot prices.

gold daily chart
Gold daily chart

Day Trading Strategies for Trading Gold

Fundamental and intermarket factors

As a commodity, gold prices depend on a number of factors such as supply and demand. In addition, monetary and fiscal decisions play an important role in pricing gold. In a strong economy, there is increased confidence for investors to buy gold. As a result, the price keeps on going up.

The better the returns in the bond and stocks market leads to higher returns in gold prices. Historically, a strong dollar leads to strong gold and vice versa.

As a day trader, you need to have a holistic approach about the fundamentals so that you can know when to enter and exit a trade. Presently, the Federal Reserve is contemplating raising interest rates. As the year progresses, We expect that the price of gold will fall in anticipation of the tightening measures.

1 month chart of Gold and EURUSD

Technical strategies for gold trading

For day traders, price movements are key to make sweet returns in gold trading. In many cases, gold will follow a certain trend. Therefore, it is your responsibility as a trader to find the trend and enter a position.

To identify a trend, trend analysis is very important. Luckily, there are tools (indicators) which can help you in this. For short term trades, you simply want to identify the support and resistance levels.

Trendlines also play a very significant role in confirming other technical indicators such as those generated by MACD and Relative Strength Index (RSI).

In our experience, we have identified the best strategy as one where we wait for the trendline to be breached before we make our entry position. To create an upward trend, the best strategy is to connect a series of rising bottoms and finding a support opportunity. On the other hand, a downward trend is created by joining a series of highs.

Another technical strategy to use is that of moving averages because they are simple to use and easy to generate. The best buying position is when the shorter term, faster moving average passes above the slower one. Also, you can sell when the faster average crosses below the slower average in a trending market.

To execute this strategy in the best way, you need to first understand the type of market, whether it is a trending market or a range bound market. Other trend analysis indicators you can use include:

Identifying a divergence is also very important. A good indicator to help you in this is the Relative Strength Index (RSI). Quite often, the RSI will hit highs and lows as gold price turns either down or upwards.

To place a trade, you should always try to find a confirmation of the divergence. Confirmation leads to an increase in confidence. With increased confidence, the result will be a better trade.

A Brief Guide on Technical Analysis and the Tools You Can Use

5 Tips to improve your Gold Trading strategies

Ok, You are now familiar with the best ways to trade gold. However, there are other tips you can follow to further improve your ability to generate profits from the blond metal.

1 - Read about Gold

The first thing you need to do is to read about gold (here a selection of day trading books). You should read about the various aspects of gold such as its history, the main exporters and importers of gold, and its use. You should also read how gold relates to other asset classes such as bonds, currencies, and stocks.

There are many books on gold investing that you can read. Some of the best books on gold are: Barry Eichengreen's Golden Fetters, Peter Bernstein's The Power of Gold, and James Rickards’ The death of money.

These books will give you a boost on the fundamental information you need to understand gold and how it works.

You also need to always have the latest information with you as soon as it breaks.

A few tools that might help you with this are: Bloomberg (TV, Twitter, and their website), Wall Street Journal, CNBC, and StockTwits among others. You should adjust your trades as soon as a news relating to gold breaks.

2 - Relationships

We spoiled this point above. You should carefully identify the relationships between gold and other asset classes.

Gold relates in a certain way between the major asset classes. For instance, gold tends to go up during the periods of high uncertainties. It also tends to go up when the dollar weakens and when the US market is going down.

The logic behind this is simple: as the market goes up, investors try to find opportunities to make money in the stock. They mobilize their resources from gold to buy stocks. In addition, when the dollar is losing its value, investors will buy gold as a way of mitigating risks.

Therefore, you should take time to understand these relationships and how they work.

3 - Develop a Strategy

After learning and understanding how gold trading works, you should now take time to develop a strategy. This should guide you on when to buy, hold, or short gold. The strategy can either be technical or fundamental, as we was above. You can also combine the two analysis methods to create a trading strategy.

The strategy can be manual or automatic. In a manual trading strategy, you will take time to look at your charts until a time when your parameters are met. You will then open a trade when all the parameters are met.

An automatic strategy is one where algorithms execute the trades when the parameters are met. You should always back-test the strategies to ensure that its accurate.

⇒ 4 timeless strategy you should know

4 - Back-Test the Strategy

After developing the strategy, you should now back-test it to ensure that it’s accurate. While no strategy is 100% accurate or risk-free, your strategy should have a high accuracy level. In this, you should do the best you can to create various models and backtest the tool with it.

This process should take a period of between a month or two. Also, you should use only a few tools to create the system. The more tools you use, the tougher it will be for you to become successful.

The Bottom-line

To make sweet returns in trading gold, you need to understand the key factors that lead to price movements. In addition, having a good understanding about the economy will help you make confident results.

After understanding the macro conditions, you should now focus on technical analysis.

By understanding the trend, and knowing how to identify the divergence, you will be at a good position to make good entry and exit decisions.

Other useful resources in gold trading

  • Simple gold trading strategies - Trading Strategy Guides

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