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An In-Depth Guide to Building Your Gold Trading Strategy

An In-Depth Guide to Building Your Gold Trading Strategy, FP Markets

Reading Time: 8 Minutes

Gold’s history, as opposed to other precious metals’ monetary value, began over 5,000 years ago.

With the surge in global production, some countries began to use Au (gold) as a temporary national currency.  Eventually, a gold standard was created, which tied the value of money to a specific amount of gold.

Nowadays, paper fiat currency and cryptocurrencies have largely replaced the role of gold as the primary means of payment. Gold is an investment instrument used in precious metals trading, generally as a safe-haven asset to diversify the portfolio of investors and hedge against risks.

XAU (1 troy ounce of gold) is used in speculative trading, long-term investment, and the gold reserve. The main gold-trading investment participants are central banks, the IMF, commercial banks, investors of exchange-traded funds (ETFs), individual traders, gold-producing companies, and gold consumers.

 

What Influences the Price of Gold?

  • Inflation.

Although gold generally won’t provide the same returns as stocks as an investment, it is considered protection against inflation.

The rarity of gold as a commodity and its long history as a reliable means of trade gives it its value. When there is economic uncertainty and excessive inflation, the value of gold often increases.

  • Deflation.

Gold may be a powerful hedge against inflation and deflation; in reality, gold’s buying power is more inclined to increase during deflationary times than during inflationary ones.

According to historical examples, gold’s value increases during deflationary times.

 

  • Greed and Fear.

Market participants trade gold in response to one of these emotions: greed or fear.

Say, for instance, that the global financial markets experience a selloff and gold has a significant rise. Many traders rush in, assuming that fear and greed are driving up the price action of the yellow metal because the emotional investors will do so mindlessly.

Inflation may have been the cause of the stock’s drop, drawing a more technical audience that will actively sell against the gold surge.

 

  • Supply and Demand.

Global supply and demand.

Jewelry, investments (mostly gold ETFs), central banks, technology, and dentistry are just a few uses for valuable metals and can influence supply and demand of the yellow metal.

How to Trade Gold: A Gold Trading Strategy

A number of trading strategies exist to effectively navigate the gold market, through several different financial instruments, such as spread betting, Contract for Differences (CFDs), and gold futures (think futures contracts or futures price [derivatives]). These can all be traded based on the price movements of the physical commodity. Fortunately, with FP Markets, we offer gold through CFDs. You can start trading via our multi-functional trading platforms; we also offer several different trading accounts (including a demo account) to suit the needs of traders and investors.

 

Gold Trend-Following Strategy

Trend-following strategies offer trading and investors a method of identifying potential trending environments. Do bear in mind that this is only one trading strategy featured here and focuses on technical analysis (rather than fundamental analysis). There are many different ways to trade the gold market, however, including more short-term gold trading methodologies – think scalping and day trading – chart patterns. Each strategy, however, must take into account volatility and the liquidity of your traded market.

A popular trend-following strategy uses technical indicators: the 200-day and the 50-day simple moving average crossover, often appreciated by beginner gold traders and investors. Examples of the 200-day (blue line) and 50-day (orange line) simple moving average are shown in the price chart below—figure 1.A. Note that the chart provides the real-time prices of XAU/USD (gold versus the US dollar) via the daily timeframe.

The idea behind this strategy is to trade long (buy) when the 50-day simple moving average crosses above the 200-day simple moving average, and short (sell) when the 50-day simple moving average crosses below the 200-day simple moving average.

As you can see in figure 1.A, there are a number of crossovers visible. In February of 2016, you will note the 50-day simple moving average crosses above the 200-day simple moving average, offering a bullish (uptrend reversal) buy signal. Traders generally place their protective stop-loss order (an important element of risk management) below the most recent higher low or support level and liquidate their position when the 50-day simple moving average crosses back below the 200-day simple moving average, which is essentially a bearish (downtrend reversal) sell signal (occurred in October of 2016). Hence, this can be traded as a trend-following strategy that is always in the market.

A prominent example of a bullish signal that worked very nicely is the 50-day simple moving average crossing above the 200-day simple moving average in February 2019. As you can see, traders (or investors) who took this long signal would have likely remained in the market until the 50-day simple moving average crossed back under the 200-day simple moving average in December of 2020.

Ultimately, this is an easy-to-follow gold trading strategy that capitalises on the price movement of gold in trending environments.

An In-Depth Guide to Building Your Gold Trading Strategy, FP Markets

Figure 1.A (XAU/USD Daily Timeframe with 200/50-Day Simple Moving Averages Applied)

  • An In-Depth Guide to Building Your Gold Trading Strategy, FP Markets
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