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Gold is one of the world’s most prized and valuable precious metals, used to create jewellery, art and currency throughout history. Nothing has quite gripped human culture like gold. XAU/USD represents spot gold prices in terms of the US dollar and serves as a tradable financial asset. Currency pairs are displayed similarly; price action reflects the change of one currency against another currency, hence the term currency pairs. For example, EUR/USD is a widely traded currency pair in the foreign exchange market, reflecting the euro’s dollar value. In the simplest of terms, the pairing of currencies (or other asset classes) like this is just a way of measuring the value and strength of an asset by running the price parallel to another currency.
From dusty market stalls to our mobile devices, the gold market has flourished. Alongside the forex market, the boom in technology allowed buyers and sellers to act and interact with the global market from their PCs, laptops and mobile phones. Like forex trading, more often than not, you just need an internet connection, some knowledge and a little spare capital access to the gold markets.
Gold is traded in a number of different ways. The asset remains one of the most popular long-term investments, seen as a hedge against inflation and economic and political uncertainty. Day trading is also a popular way to engage with price action today. Buying and selling across smaller short-term time frames, intraday traders employ technical and fundamental analysis to attempt to profit from short-term price changes in gold prices.
There can never be a one-size-fits-all trading strategy for gold. To develop a ‘winning edge’, a strategy that should generate a return over the long term as long as the rules of engagement are adhered to, backtesting and forward testing to validate ideas is often recommended. This is crucial, as without a tried-and-tested approach to work from, trading in the live markets will likely prove a frustrating endeavour.
Understanding what moves gold is also imperative. Psychologically, emotions like fear and greed play a part in the gold markets, influencing market sentiment. Monitoring interest rates is also key to determining the direction of gold, given its correlation to real yields (yields adjusted for inflation). As interest-bearing instruments fall out of favour, particularly in environments where inflation is high, this can see investors favour the price of gold, as we have seen in Q4 of 2022 and Q1 of 2023.
Another useful tip for gold traders is to follow seasonal patterns for technical analysis. Gold moves cyclically, rallying more during some months. Study historical charts and take particular notice of any repetitive bullish periods to cash in on seasonal growth. Again, certain times when US Treasury rates are changed will reflect directly on the price of gold.
Looking over more specific periods, traders will want to execute their positions during the times of highest liquidity. Although the gold market trades 24 hours a day, the highest point of liquidity is frequently around when the US New York market opens.
Trend-following technical strategies are also popular with gold’s price action. Investors may employ moving averages, along with basic price structure to determine highs and lows, and technical indicators, such as the Average Directional Index, or ADX.
Trading the price movement of gold can be profitable if the trader or investor invests in their education to learn what it takes to become a consistently profitable trader. It is not a case of taking a weekend course and waiting for one line to cross another from your favourite technical indicator. Trading the metals market profitably requires a unique skill set consisting of sound technical and fundamental knowledge, awareness of risk-management strategies and a keen understanding of the trading mindset.
Consider visiting the FP Markets Traders Hub our in-house analysts provide daily and weekly reports across the financial markets. Alternatively, visit the FP Markets Trading Academy, a home for newer traders designed to help inspire learning and growth.
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