6 Essential gold trading strategies for all traders

Publish Date 21 Apr 2022
Education / 6 Min Read
Milan Cutkovic / Last Update 21 Apr 2022

Gold is one of the world’s oldest and most trusted forms of currency. For traders, gold's intrinsic value, or “safe haven” appeal – makes it a popular investment and a great way to diversify a portfolio.

Gold is also known as one of the most popular trading instruments for both intraday and swing traders. Many different strategies have been developed to trade gold, but some are more essential than others.

In this article, we will look at some of the most popular gold trading strategies used by gold traders worldwide.

If you are new to trading gold, these strategies will help you get started on the right foot. Even better for new traders is our gold trading course which you can sign up for FREE!

But if you are a seasoned trader, these strategies may help you refine your current approach and improve your results.

Why is Gold a good asset to trade?

Gold is a highly liquid trading instrument. The average daily trading volume for Gold in 2021 is estimated to be $130 billion. Gold is traded in multiple hubs and most of the trading is done over-the-counter.

The benefit of trading a highly liquid trading instrument such as gold is that the spreads will generally be lower (for example, compared to Palladium and Platinum, which are far less liquid) and traders will be able to execute large trades without moving the market too much.

While gold can certainly be volatile, most of the time the market is liquid enough to prevent too many erratic price movements.

Gold is a great instrument for diversification, and this doesn't just apply to investing. Traders who are heavily focused on currencies or stocks will find it useful from time to time to look at other trading instruments, particularly if there is a lack of trading opportunities in their favourite asset classes. There are a variety of factors driving the gold price, and traders can seize this opportunity.

Physical gold bars and coins

What is a gold trading strategy?

Let's first have a look at what a trading strategy is.

A trading strategy can be described as a set of rules that help a trader determine when to enter a trade, how to manage it and when to close it. A trading strategy can be very simple or very complex - it varies from trader to trader.

If a trader already has a trading strategy, they might be able to use the very same one for gold. In some cases, however, your existing trading strategy could be unsuitable.

For example, a range trading strategy that functions well with currency pairs that generally see lower volatility - such as EUR/GBP - will most likely perform poorly in this case, as gold tends to have higher volatility.

The best way to find out is to test your trading strategy in a risk-free demo environment. Inside the demo environment you have access to virtual funds, so please remember that success in this environment may not be directly replicated in real-time on the live MT4 platform.

Recommended reading: How to use a demo account?

Essential gold trading strategies for all traders

See our list of 6 essential gold trading strategies below:

1. Position trading

When you trade a stock, you typically look at company-related or industry-related news. When trading currencies, it will be economic data and events relevant to the country whose currency you are trading. With gold, things get a bit more complicated. There are a variety of factors that can influence the price of gold: 

  1. Geopolitical developments - The precious metal is generally seen as a safe haven, and prices tend to rise during times of geopolitical tensions. 
  2. Inflation fears - During times when investors are worried about rising inflation, gold will generally appreciate, as holding cash becomes increasingly unattractive. 
  3. Monetary policy - Gold and the US Dollar have an inverse relationship. Therefore, expectations of rising interest rates in the US will boost the Dollar and put Gold under pressure. On the other side, should US rate expectations decrease, the US Dollar may decline while gold prices rally. 
  4. Physical supply and demand - Buying gold ETFs or trading gold CFDs and futures has become popular, but physical gold is still being used for the production of jewellery and investment (e.g. coins and bars). Demand for such products will have an influence on the gold price too.

Applying fundamental analysis in gold trading hence requires you to keep an eye on various events and trends around the globe. This is suitable for medium to long term traders.

2. News trading

While this is related to fundamental analysis, news trading is a term generally used for traders who trade a specific event and may end up holding the relevant position(s) for mere seconds or a few minutes. While the gold price is sometimes influenced by events that took everyone by surprise, there are scheduled events such as economic data releases and central bank meetings that can have a significant impact on the gold price.

Examples are: Nonfarm Payrolls (NFP), inflation data and Federal Reserve meetings.

3. Trend trading strategies

Trend trading strategies involve identifying trade opportunities in the direction of the trend. The idea behind it is that the trading instrument will continue to move in the same direction as it is currently trending (up or down).

When prices are consistently rising (posting higher highs), we are talking about an uptrend. Vice-versa, declining prices (the trading instrument is making lower lows) will indicate a downtrend.

The good news is that gold tends to be fairly volatile, which results in strong trends forming from time to time. Below is a chart that shows periods when gold was trending strongly - both up and down.

Gold price chart highlighting a trend trading strategy

Traders will often make use of technical indicators when applying a trend trading strategy. We will mention some of the most popular indicators later in the article.

4. Day trading strategy

Day traders usually do not hold trades only for seconds, as scalpers do. However, their trading day also tends to be focused on a specific session or time of the day, when they try to act on opportunities. While scalpers might use an M1 chart to trade, day traders tend to use anything from the M15 up to the H1 chart. Scalpers tend to open more than 10 trades per day (some highly active traders might end up with even more than 100 per day), while day traders usually take it a bit slower and try to find 2-3 good opportunities per day.

Gold is suitable for day trading as it is a highly liquid trading instrument, the spreads are low (especially compared to other commodities), and volatility is high enough on most days for trading opportunities to present themselves.

5. Price action trading

Price action trading is a strategy that focuses on making decisions based on the price movements of a certain instrument instead of incorporating technical indicators (e.g. RSI, MACD, Bollinger Bands). There is a variety of price action strategies traders can utilise - from breakouts to reversals to simple and advanced candlestick patterns. 

It can easily be implemented across all timeframes, which is a major advantage. For example, a day trader might trade a breakout in gold on the M15 chart, while a swing trader could place a trade based on a breakout (same pattern) on a H4 chart.

6. Expert advisors / Copy trading

There are plenty of expert advisors (EAs) that were built specifically for gold trading. At the same time, there are signal providers who are specialising in gold trading, and who traders can copy through various copy trading apps. This strategy is more suitable for beginners, or experienced traders who do not see their existing strategies as being compatible with gold, and lack the time to develop a new one.

Copy trading CTA box

Best indicators for gold trading

There are numerous indicators that can be used to help predict gold's price movements. Discover some of the best indicators for gold trading below.

Relative strength indicator (RSI)

The Relative Strength Indicator (RSI) is one of the most popular technical indicators used by traders. It is a useful tool to identify when a trading instrument - in this case gold - is overbought or oversold.

If the RSI drops below 30, we would say that it has entered oversold territory. On the other hand, an RSI value of 70 and above would indicate overbought conditions.

Gold price chart using an RSI indicator showing the commodity is overbought

RSI can be a great tool for filtering signals. For example, if you receive a buy signal, you could check the RSI value. If it lies above 70, you may want to reconsider buying gold, as it is already in overbought territory. A value below 70 would be preferable. 

While you will miss out on some trading opportunities, it could improve the overall quality of the signals you are getting from your trading strategy. Learn more about the advanced RSI trading strategy.

Moving averages indicator

Moving averages are simple but effective indicators that can help gold traders. They can be used to simply gauge the direction of the market - for example, plotting a 200 MA on a daily chart.

In addition to that, they can be used as indicators that generate entry/exit signals. For example, you could plot a fast-moving (10) and a slow-moving (20) MA on the hourly chart. Once the 10 MA crosses above the 20 MA, it would generate a buy signal. If the 10 MA crosses below the 20 MA, it would create a sell signal.

Chart showing the moving average indicator on XAUUSD instrument

This is a simplified example. In real life, you will need to test out various parameters and introduce other tools to help you filter out the bad signals. You also need to make sure that gold is currently moving in a trend (either up or down). If gold is consolidating in a range, you will get a lot of false signals.

Bollinger bands

Bollinger bands are a set of three lines that represent volatility, which is the range in prices that they have historically traded within.

The two outer lines show where upper and lower levels of price movement should be expected to trade 90% of the time (the trading band) while the middle line shows real-time price action moving between those bounds as it fluctuates day-to-day. When these bands contract (shrink), this indicates high volatility; when these bands expand, this suggests gold might be experiencing a period of low volatility.

Bollinger bands indicator on the XAUUSD chart

How to choose the best gold trading strategy?

There is no trading strategy that can be described as "the best" for trading gold. One strategy might work incredibly well for trader A, but poorly for trader B. One significant factor is that trading psychology plays a big role in the markets.  

Before you start developing trading strategies, it is recommended for you to find out what type of trader you are and develop a trading plan that includes risk management rules (e.g. how much you are willing to risk per trade).  

Once you have a good idea of whether you want to be a scalper or a long-term trader, and whether you want to rely on technical analysis or fundamental analysis or a combination of both, you can start developing a suitable trading strategy.

When it comes to the testing phase, a demo account can be your best friend. It allows you to do backtesting, but also to test your strategy in real-time, while not taking any risks. You can learn about the characteristics of gold and what is driving its price in advance, but observing the price action and testing the strategy in real-time will give you a better feeling for the market.

Which gold trading session is best?

Gold can be traded as spot contracts and as futures contracts with Axi. 

The symbol for the spot contract is XAU/USD and it can be traded from Monday 01:01 AM until Friday 23:58 with a daily trading break between 23:59 to 01:01. All times are MT4 server time.

The gold futures contract can be located under the symbol name "GOLD.fs". Trading hours run from 18:01 Sunday until 16:59 Friday with a daily trading break between 16:59 and 18:01. All times are New York time (GMT-4), as the underlying futures contract is traded in New York. 

Generally, liquidity will be highest during the London trading session and the first half of the New York trading session. Scalpers and intraday traders might prefer to trade gold during those sessions, as the spreads will be the lowest and the number of trade opportunities higher than during the traditionally quieter Asian session.

FAQ


Which moving average is best for gold trading?

There is no one 'best' moving average for gold trading. Different traders may prefer different moving averages based on their individual trading strategies and preferences.

Some traders may find that a shorter-term moving average (such as a 5-day or 10-day moving average) works better for them, while others may prefer to use a longer-term moving average (such as a 50-day or 200-day moving average). It really depends on the trader's personal preferences and what they are trying to achieve with their trading strategy.


Is gold the best precious metal to trade?

In terms of long-term stability, gold is the best precious metal to trade because its price is relatively stable when compared to other metals. For example, in times of economic recession or global financial instability, the value of gold usually does not decline as much as other metals such as silver or platinum.

This relative stability is due, in part, to the fact that gold is not used for day-to-day transactions as much as other precious metals. Instead, it tends to be viewed more as a store of value or 'investment commodity'. As a result, fluctuations in gold's price are usually less affected by short-term economic trends than those of other metals.



Milan Cutkovic

Market Analyst, Axi

Milan Cutkovic has over eight years of experience in trading and market analysis across forex, indices, commodities, and stocks. He was one of the first traders accepted into the Axi Select program which identifies highly talented traders and assists them with professional development. Milan uses his extensive knowledge of financial markets to provide unique insights, commentary and market analysis.

 

 

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.


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