9 Tips for Trading Gold

Gold is one of the most popular traded assets and commodities in the world. It is a precious metal that has attracted people for centuries, both for its unique attractiveness and no doubt, for its financial value. 

In today’s uncertain market environment, bullion can be an effective way to protect your capital against volatility. Owning gold can be a great way of diversifying your portfolio – experts typically recommend limiting it to 5% to 10% ^[1]. 

The good news for you, is that there are some relatively easy ways to get involved in trading the precious metal. Buying and selling gold comes in several forms, like CFDs, ETFs, futures and even physical gold. 

Prices are affected by the US dollar, inflation, interest rates, and supply and demand. 

But in this article, we explore some handy tips for trading gold. 

Key Points

• Focus on trading cycles and turning points in the gold market to maximize profits during both booms and busts.

• Utilise technical indicators like RSI and Stochastic to identify overbought or oversold conditions, guiding your buy or sell decisions.

• Observe trading volumes and price formations to predict potential price movements and confirm trading signals, ensuring better trade decisions.

1. Focus on cycles and turning points

The gold market generally tends to move in a cyclical way which means spotting and trading turning points can be highly profitable when entering and exiting both short-term and long-term positions. 

A cycle typically involves a period of ‘boom’ and prosperity, and on the flip side, a period of ‘bust’ and recession. Gold will usually outperform during times of uncertainty due to its long-recognised role as a safe haven asset. 

Turning points are simply when the price of gold changes direction. This does not mean the price will form a top or bottom, only the timing is known. Some analysts believe gold’s turning points are a bit shorter than every two months ^[2].

2. Use RSI and Stochastic Indicators

A useful gold trading tip is to use popular technical indicators like the Relative Strength Index (RSI) and Stochastics. The RSI uses a scale of 0 to 100 and tells us when a market is overbought or oversold, which can then generate signals to buy or sell gold. An overbought market typically is above 70 and might indicate a potential top. An oversold market is likely to be below 30 and might point to a bottom. 

Stochastics help determine where a trend might be ending by effectively measuring the momentum of price. It also scaled from 0 to 100, above 80 denoting overbought and below 20 meaning possibly oversold. 

3. Use Moving Averages

Moving averages are one of the most commonly used technical indicators. They are helpful in smoothing out market noise and determining actual trend direction. However, they can be slow to respond to price action.

In fact, a tip for trading gold could be to use the 50-day and 200-day moving average to figure out dynamic support and resistance levels. But it’s best to check if moving averages have worked in your trading timeframe as price action may ignore certain types of averages ^[3].

4. Use Trend Lines / Channels

Trend lines and channels are probably the easiest and most popular form of technical analysis. If they are used and drawn correctly, they can be as accurate and useful as any indicator. 

Tips for gold trading include ensuring there are at least two tops or bottoms to draw a valid trend line, but three are needed to confirm a trend line. In addition, the steeper the trend line you draw, the less reliable it might be, with a bigger chance of breaking. 

5. Observe the Trading Volume

Monitoring trade volumes can be especially helpful when determining market direction and strategy. A gold rally with high volumes could mean prices are in for an extended period of upside as the move can extend.

In contrast, falling gold prices together with rising volumes might point to the decline continuing for some time. That said, a drop in gold followed by falling volumes may not be that significant, so it is sometimes wise to use other indicators as well in your trading plan.

6. Look for Price Formations 

One tip for trading gold that helps many traders of all levels, from beginners to advanced, is analysing price formations. These can come in many different forms, from a bullish flag or pennant to a bearish long-term head and shoulders reversal.

The gold price can often move in typical, historic price patterns that foresee upside breakouts or sharp movements lower. It is always worth making sure this type of price action has been seen before. In addition, using other technical indicators can improve your understanding of gold price action. 

7. Be patient and wait for confirmation

One of the most important lessons when trading gold, indeed any market, is to have patience. This entails discipline of when to trade and not to trade, waiting for your indicators to confirm the trading signal. The market will always offer trading opportunities, so you should never have FOMO as a trader. 

For example, some experts believe that it’s worth waiting for three consecutive closing prices below/above the critical gold price level before viewing the breakout/breakdown as “confirmed” and so meaningful. Any invalidation of an upside breakout could be bearish, while a breakdown may be bullish ^[4].

8. Focus on small trades

A great rule to always have when buying and selling gold if you are new to trading, is to keep your position size small. This should be calculated in proportion to your trading pot and as a general rule, is never more than 2% of your total trading capital ^[5]. 

When you trade gold using small position sizes, it enables you to fully understand price action, fundamentals and technicals driving the precious metal. This will hopefully protect you against big losses and a major drawdown that could affect your ability to trade over the long-term.

9. Analyse other markets

We mentioned at the top of the article how the gold market is influenced by numerous factors, including the US dollar, interest rates and inflation. Of course, that means several other markets like foreign exchange and bond markets will have a major impact on gold prices.

For example, a good tip for trading gold is always to understand and watch what the US dollar is doing. Gold is priced in USD so when the dollar weakens, bullion is cheaper compared to other currencies that investors hold. 

Conclusion

We hope some of our tips for trading gold have been useful. Gold will always be a fascinating asset to trade, simply because it holds an appeal like very few other tradeable instruments. 

You can trade gold via CFDs with Vantage, as your trusted and secure broker.

Reference