Gold is a precious metal that has been in use for centuries. At first, it was used for making jewelry and other luxury objects, later ancient Egyptians started to use this precious metal as a means of trading.
Gold is a great asset to invest in to keep your wealth intact from inflation. Historically, gold has proven to be a type of asset that increases in value in times of crises and inflation. Investors can purchase physical gold and speculators that are aiming to get short time benefits, use leverage and trade gold as CFDs. Below, you can see the historic gold CFD performance against the US Dollar. The US Dollar purchasing power and the gold value are negatively correlated. That is because, investors buy gold in times of crises and inflation.
Often, traders use fundamentals such as interest rate decisions and Consumer Price Index (CPI) to make decisions. For technical traders, there are various strategies to trade gold. We’ll discuss the crossover strategy that is mainly used by short-term traders, and the Fibonacci retracement strategy.
Core features of Crossover strategy
- Ideal for currency pairs: XAU/USD
- Ideal chart time frame: 1 hour
- Required time per day: As much as possible
- Possible drawdown: Medium
- Possible ROI: High in the short term, Low in the long term
- Recommended trade size: 0.1 lot
- Recommended trading platform: MetaTrader 4
How does crossover strategy work?
For short-term traders, one of the best strategies to use is a simple crossover strategy using moving averages. Moving averages are great for trading trends, and gold price is trending up historically.
Crossover is a simple trading strategy. Traders open a buy position when the short-term moving average crosses over the long-term moving average. This signals that more people have started to purchase gold and prices are expected to increase. When using this strategy, the suggested time frame for your chart is 1-hour. Short time frames are generally used for short term speculators.
This strategy also works for downtrend markets as well. The main difference is that we are waiting for the long-period moving average to cross over and go above the short-period moving average. Once this happens, we get sell entering signal. This is a very simple strategy that is good for beginner traders to get accustomed to the market.
Pros and Cons of Crossover strategy
Being a popular and simple strategy, it has its own advantages and disadvantages. This should be no surprise, as there is no such thing as perfect gold trading strategies for traders. Markets go from ranges to trends, and each market condition requires a different approach. Let’s take a look at the Pros and Cons of Crossover strategy.
Pros
- Is easy to use even for newbie traders
- A good strategy for algorithmic traders who want to automate their trading activities
- Provides general insight into the market
Cons
- Relying on just this strategy might not be the best idea
- If we have a sideways market, using this strategy is most likely to result in losses
Example of Crossover gold trading
Now let’s take a look at an example of a crossover strategy. Being one of the most simple and best gold trading strategies, it should not be hard to use. First, we need to select what period simple moving averages are we going to use. For this example, we are day-trading and are using 1-hour timeframes, along with 10 and 60-period Simple Moving Averages.
Now looking at the chart, we have a 10-period moving average in the form of a blue line, and a 60-period in the form of a red line. We see that when the 10-period moving average fell below the 60-period moving average, a downtrend started. At this time we should have opened a short position. But as soon as this 10-period moving average went back above the 60-period moving average, prices jumped back up and started to rise, and here we could have opened a long position. It is this simple of a strategy to use, but be careful as it sometimes might give the wrong signals. For example, as we can see when during the latest uptrend, prices had a fast and drastic fall without any signal.
Core features of the Fibonacci trading strategy
- Ideal for currency pair: XAU/USD
- Ideal chart time frame: 6 hours
- Required time per day: Depends on the trader
- Possible drawdown: Low
- Possible ROI: High
- Recommended trade size: 0.1 lot
- Recommended trading platform: MetaTrader 5
How does gold trading using Fibonacci work?
Fibonacci Retracements are used for locating support and resistance levels and potential points where price will bounce or reverse a trend.
It’s worth mentioning that there are some periods in a year that are profitable for Gold investors. January, February, August, September, November, and December are the months that experience the highest average gold price increase. Fibonacci retracement indicators can be highly useful during such periods, as the indicator helps locate entries and exits.
If you are a speculator and not a long term investor, you can also use the retracements to trade bearish markets.
Fibonacci indicator is free to use and easy to draw on the map. Traders place the indicator by joining two extremes of a price swing. Retracement levels where prices might bounce or reverse appear automatically. These levels can be used for entering the market as well as for exiting. Stop losses are placed right outside the significant levels. For example, if you entered long from 50% level, your profit target might be at 61.8%, at 78.6% or at 100%. Stop Loss can be placed below the 50% level. The indicator can be combined with various other strategies and indicators.
Pros and cons of Fibonacci retracement
As we mentioned before, there is no such thing as the perfect strategy. When we are using Fibonacci retracement and seasonal months to go long, we might experience some setbacks.
Pros
- It is a simple strategy to use with relatively low risk and high success rate
- It is a good strategy for finding support and resistance levels
- Fibonacci retracement has a high accuracy for determining pivot points
Cons
- Despite being an easy indicator to use, traders still need to know what they are doing and can not follow this indicator blindly
- Can not be automated for Expert Advisor usage
- Hard to determine the starting point of the trend
Example of Fibonacci retracement gold trading strategy
Now let’s look at gold trading strategies example using a Fibonacci indicator. In this example, we are trading with XAU/USD trading pair in September. We are selecting this time of the year as it is known to be the successful month for gold trading, as the average return on investment during this period is relatively high. Once we enter the market and look at charts, we need to find previous market swings and look at when gold will retrace to 0.618 Fibonacci. Once this happens, we can expect the next swing to happen and should prepare for it. Then we simply enter the market at the support level. We also need to protect our position and to do so, we need to implement stop-loss.
Economic announcements
When using Fibonacci and other trading gold strategies, we should always keep an eye on economic news. Inflation that can be identified by analyzing Consumer Price Index and Interest rate decisions have a great impact on Gold valuation. When the US Dollar losses purchasing power, investors are looking for ways to store their wealth. Gold is one of the methods that can help investors achieve this objective. The more investors buy gold, the more it’s price increases
FAQs regarding gold trading strategies
Do gold trading strategies work?
In general yes. Gold is known to follow certain patterns as it has usually successful moths such as January, February, and September, and also bad moths. So building successful strategies should not be hard. But we should take into consideration that Gold is a precious metal that is affected by many factors, so sudden market swings can happen at any time, without any significant prior warnings.
Are gold trading strategies profitable?
If we are long-term traders, the profits we make might not be that big, considering the fact that gold mostly maintains its value in a long run. But in general, if we have a good strategy, making profits from trading gold should not be hard, if we know what we are doing.
How is XAU/USD traded?
Gold trades on the gold spot market, where it is denoted as XAU. When looking at XAU/USD pair, it tells us how many dollars one ounce of gold is worth. Some markets even have the option to showcase prices for grams and not ounces. The most common benchmark for gold pricing has been London gold fixing, which is a meeting of representatives from the five biggest gold trading companies in London.