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How to Trade Gold: Gold Trading Strategies
What is Gold Trading
Gold is in fact the most traded and popular precious metal on the commodity market. It is a very attractive investment due to many factors; for example, traders invest in gold to diversify risks, gold is the most stable safe heaven in the majority of countries, markets offer various ways of investing in gold even without owning the yellow metal physically, etc.
However, like any other market, the gold market is also vulnerable to volatility and speculation. Geopolitical and economic uncertainty, significant economic data, major currencies (especially USD) rates, supply/demand ratio may affect gold prices seriously. That’s why it is so important to develop a suitable and wise gold trading strategy and stick to it. For instance, XAUUSD trading may be an excellent choice even for a novice trader, who has learned the basics of FX and commodity trading and constantly monitors the gold price chart, while considering the technical analysis of the instrument traded.
A brief history of trading gold
Gold has been a highly demanded and appreciated precious metal since ancient times. The demand has always been high due to its deficiency, poor access to the fields, and difficult mining.
People all over the world always wanted to control the gold mines and trading. Gold was widely used in jewelry and used to be a stable currency for trading for thousands of years. Why does gold remain an attractive investment? Because it refers to metals that do not corrode.
Lately, gold has been used in the smartphone industry and electronics as a useful electrical component. And as there is still a high need for the yellow metal in the world, it is very important for online traders to learn the basics of how to trade gold in markets.
It’s not a secret that this precious metal is still considered a “safe haven”, which means that when the markets are highly volatile, traders can often observe a jump in the gold quotes since traders invest their money in gold.
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1978 and the changes it brought
From ancient times until the 20th century, the value of coins of any state was determined not by the denomination but by the quantity of gold it was based on, which in the era of "paper money" also acted as the "gold standard", abolished in 1971 in the United States. In 1978, after the Jamaican meeting of the G7 leaders, the world has witnessed a global reform of the monetary system due to the refusal to peg national currencies to gold or the dollar, which led to the emergence of the foreign exchange market.
The major aftermath of the decision was the valuation of all currencies through the US dollar, adopted by the heads of the world's leading states. After the official ratification in 1978 by the International Monetary Fund of “decoupling” currencies from the “gold standard”*, the US Federal Reserve has sharply reduced the share of gold-backed dollars in circulation. Since then, the number of unsecured printed banknotes has only grown.
*A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold.
Nowadays ways to trade gold
The market offers many different ways to invest in gold, let’s consider the most popular of them:
- Physical gold - traders speculate on the price holding physical gold bullion (bars, coins).
- Gold CFDs - CFD traders do not buy/own the underlying asset, but they speculate on the upward/downward movements of the gold price.
- Gold ETFs - ETF traders do not possess gold physically, gold ETF consists of 1 principal asset - gold, though the fund itself consists of gold derivatives contracts backed by gold.
- Gold futures - traders can speculate on the future gold price fluctuations, which means the gold is traded at an agreed price at a certain time in the future.
- Gold stocks - investors purchase the stocks of gold mining companies
Nowadays ways to trade gold
At IFC Markets we highlighted the main steps to start trading gold in the market.
1. Define your objectives
Specify your short and long term goals, manage possible risks and profits you expect.
2. Choose trading asset(s)
Decide, what exactly you are going to trade: physical gold, gold CFD, gold ETF, gold futures, gold stocks, etc.
3.Work out a gold trading strategy
Develop a wise and suitable trading strategy and stick to it. It may be an investment into gold mining companies’ stocks, or gold scalping strategy, gold day trading strategy, etc. Pay great attention to both the technical analysis and fundamental analysis, use different technical indicators to analyze past and predict future price movements, follow the gold price chart and stay on top of important economic events and data.
4.Pick a broker.
Find a suitable and reliable gold broker, to whom you can entrust your funds, and open an account. IFC Markets offers different ways to trade gold: CFDs on stocks, CFDs on futures, CFDs on gold correlated currencies, and others. In addition to existing assets in the market, IFC Markets developed its own trading platform NetTradeX, which allows traders to create and trade Personal Composite Instruments (PCIs).
5.Test your strategy.
Test your trading strategy on a demo account, or on a real account but with a small deposit first. Make corrections if necessary.
Gold trading strategies
As the gold market is tightly connected to the commodity, equity and forex markets, it becomes a bit harder to take in account all the possible impacts and future movements of the gold price. However, there are some common principles and trading strategies that you can draw upon. Let’s briefly consider them.
News trading.
Gold assets are constantly influenced by various geopolitical and economic factors, crises, usual statistical data, demand/supply ratio and greed/fear. It is also connected to other markets, so any changes in their sentiment would directly affect gold quotes. Traders should be careful when opening positions during economic events and right after them since no one knows which way the market will move. However, trading on significant news or statistics may be quite profitable, if you place stop loss and take profit orders correctly.
Correlations with other currencies.
Even novice traders may have noticed, that gold and USD move in opposite directions: when traders actively buy USD, gold quotes move down, and vice versa. So, when trading yellow metal, you can open several price charts and follow them up to determine the entry and exit points: AUD/USD, XAU/USD, USD/CHF, EUR/USD.
Seasonal trading.
Gold traders can observe seasonal patterns of gold price action, such as the strengthening of the gold in the first and last months of the year and the weakening during the rest period of time. A trader can open a long position in January when the price tends to grow: this decision should be supported by technical indicators, chart patterns, and other setups. Profit should be taken before the end of the 1st quarter of the year (for example, in late February) when the gold price usually declines.
Gold Trading Tips
As you may have noticed from above, the gold market has some specific features that should be investigated closely before trading gold. Anyways, many traders and brokers offer some tips to make it easier and less risky. Here are some, highlighted by IFC Markets:
- Before using any indicator in your trading, first check its performance.
- Consider seasonality of gold trading.
- Try to find cycles in the market, it can help you: most markets are cyclical, and the gold market is not an exception.
- Diversify your portfolio, trade different assets not connected to each other, it helps manage risks.
- Stay on the top of political and economic news and statistics.
- Track the gold market sentiment.
- Monitor the movement of the rival currencies, it may help predict the gold trend.
- Consider the gold supply/demand ratio in terms of developing electronics and jewelry production.
- Use both technical and fundamental analysis.
- Pay attention to chart patterns formation and trend confirmation.
Bottom Line
Gold trading isn’t the easiest job to do, but with good knowledge of the market and a reliable broker, one can make good money trading gold instruments. Investing in gold you get a potential profit source. Develop a working strategy, stick to it and be patient. Let this article guide you on your way to the gold market.
