6 Tips for Trading Gold (XAU/USD)   

Updated May 13, 2022 CommoditiesGoldGuides

For many years, gold has served as a reliable store of value and one of the earliest currencies. It has limited practical use, but traders recognise it as a form of wealth like fiat currency is. Many traders use it that way because it is a tangible asset that exists in the world, rather than just numbers on a computer.

Gold is also relatively resistant to central banks or monetary policy, which speaks to its inherent value.

Why You Should Consider Trading Gold

Many people who would not otherwise trade gold can now do so, because of the diversification of gold markets. Previously, you’d have to purchase physical gold bullion, coins, or other forms of the precious metal to own it. Even though you can still do that now, there are many other ways to trade gold online.

You can trade gold in various ways, including futures markets, spot and options, and exchange-traded funds (ETFs). You can also trade gold against the dollar and several other major currencies. And just like the forex market, gold and other precious metals have a lot of liquidity.

Gold has a greater daily trading volume than most currency pairs, except for majors like EURUSD, USDJPY, and GBPUSD. Because of its massive daily trading volume, the fees and charges for trading gold in the markets are relatively low.

How to Invest in Gold

If you’re just getting started in the markets, here are several ways you can participate in trading gold:

  • Gold Spot US Dollar or XAU/USD
  • Gold Contract for Differences (CFDs)
  • Gold ETFs
  • Gold mining stocks
  • Gold futures [1]

Although this list isn’t exhaustive, these are the most common ways to trade gold in the securities markets.

6 Tips for Trading Gold XAU/USD CFD

If you’re starting out with the XAU/USD pair, here are some tips to keep in mind.

1. Pay Attention to Gold Purchases Made by Central Banks

All central banks own gold because of its direct relationship with banknotes and coins. Also, most central banks store gold to diversify the financial risk of their countries. The reason they do this is to benefit from the stability both gold and foreign currency reserves give while together, rather than apart.

So, when central banks anticipate currency instability, they often purchase gold to hedge that risk – a fundamental indicator. For this reason, look out for when central banks start buying massive quantities of gold.

A good example is a recent announcement by the Russian central bank to buy gold from commercial banks at a fixed price to support the Russian Ruble[2].

Such a move signals two things: First, a government is acting on the assumption that major currency values will fall. For this reason, traders shift significant amounts of their investments to less volatile funds.

Second, such moves usually lead to an increase in gold prices — at least in the short term.

Making trades during such announcements allows you to take advantage of the resulting volatility in the XAU/USD pair.

2. Observe the Effects of Geopolitics on Currencies

Political and economic instability around the world usually causes volatility in currency prices. During such events, gold provides a safe haven for many other liquid assets.

If you open an XAU/USD position, you can potentially protect your assets from unforeseen conditions that can impact other currency markets. Gold has a strong relationship with the US dollar and other stable currencies like the Euro, the Japanese Yuan, and the GBP.

The Russian invasion of Ukraine is an excellent example. It caused the price of the dollar to skyrocket, while the Russian Rouble lost ground[3]. Taking an XAU/USD position in this case, could have allowed you to take advantage of opportunities in the market.

3. Target Previous Highs and Lows 

The XAU/USD pair tends to follow trends and trade within a specific range. That provides you with an excellent opportunity to take advantage of buy and sell signals within the previous lows and highs.

When gold is trending upwards, target a historical previous price as your sell price, and when it trends downwards a previous low. Most times, it can return to its previous highs or lows.

Although targeting previous lows and highs is low risk, it isn’t ideal for day trading. It may take time for gold to hit old highs or old lows, and that takes away any opportunity for a quick upside.

4. Trade During New York Hours

Although gold trades happen around the clock, you’ll find most of the market liquidity during New York trading hours. The market’s liquidity and your trading goals will determine your strategy [4].

You can trade during peak hours where there’s plenty of liquidity and low volatility. However, if you’re scalping, trading after-hours will provide you with the necessary volatility to potentially make positive gains from your strategy. But, always remember that volatility comes with an added risk of losses to any XAU/USD position you take.

5. Analyse with the Symmetrical Triangle

The symmetrical triangle is a straightforward chart pattern that shows a period of consolidation before a price breakout. When two trend lines with identical slopes but different directions converge, you have a symmetrical triangle. [5]

When these two trendlines converge, price movements between the XAU/USD pair grows tighter, and open up a window of opportunity for you to take advantage of a breakout.

Most times, you’ll use the symmetrical triangle pattern with other technical indicators like the Relative Strength Index (RSI).

When other indicators point to a possible price breakout, the symmetrical triangle can provide you with supporting confirmation and boosts your confidence in taking an XAU/USD position.

Once the two trend lines converge, put a stop-loss order slightly below the descending trend line.

6. Follow Gold Demand for Industrial and Commercial Uses

A good example for gold demand comes from the jewellery industry. Track the demand for gold in consumer markets. When the global demand for gold jewellery increases, the price of gold in the markets increases.

Other uses of gold can also affect the price of gold in the markets. For example, gold is a key component of smartphones and other electronics because of its efficient electricity conduction. An increase in demand for electronics increases the demand for gold, and that increases the price of the metal.

Final Thoughts

There’s plenty to watch out for when trading the XAU/USD CFD pair. Always look out for events that can change the behaviour of central banks and political situations that affect the price of gold. You can also tap on other tips to use your capital, or take advantage of market opportunities in other asset classes.

Past performance is not an indication of future results.


Reference

  1.  “How To Start Day Trading In Gold”. The Balance, 2022, https://www.thebalance.com/how-to-start-day-trading-gold-1031364. Accessed 21 Apr 2022.
  2.  “Russia’s Central Bank Says It Will Stop Buying Gold At A Fixed Price”. Reuters, 2022, https://www.reuters.com/business/russias-central-bank-says-it-will-stop-buying-gold-fixed-price-2022-04-07/. Accessed 21 Apr 2022.
  3.  “Dollar Jumps To Near Two-Year High As Russia Invades Ukraine”. Reuters, 2022, https://www.reuters.com/world/india/euro-skids-versus-safe-havens-ukraine-tensions-ramp-up-2022-02-24/. Accessed 21 Apr 2022.
  4.  “2022 New York Stock Exchange (NYSE) | Trading Hours | Tradinghours.Com”. Tradinghours.Com, 2022, https://www.tradinghours.com/markets/nyse/hours. Accessed 21 Apr 2022.
  5.  “Symmetrical Triangle Definition”. Investopedia, 2022, https://www.investopedia.com/terms/s/symmetricaltriangle.asp. Accessed 21 Apr 2022.

Disclaimer
Vantage does not represent or warrant that the material provided here is accurate, current, or complete, and therefore should not be relied upon as such. The information provided here, whether from a third party or not, is not to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any financial instruments; or to participate in any specific trading strategy. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. We advise any readers of this content to seek their own advice. Past performance is not an indication of future results whereas reference to examples and/or charts is solely made for illustration and/or educational purposes. Without the approval of Vantage, reproduction or redistribution of this information is not permitted.

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