The right way to trade gold

 

Let's take a look at two basic strategies and one technical strategy that you can use to buy and sell gold when trading the financial markets. This article will also touch on things to consider before trading gold.


Fundamental trading strategies measure the intrinsic value of gold through its economic and financial factors.

1. Seasonal gold patterns

If you are a short-term trader, one of the best fundamental gold trading strategies that you can use is to follow the seasonal patterns. Pros of trading gold: Gold follows a seasonal pattern and tends to go up during some months.


During these months, gold prices have an above average price.

2. Inverted gold prices and US Treasury prices

Using US Treasury rates can be an alternative primary strategy if you have a long-term trading perspective. US Treasury rates usually lead to an opposite response from gold prices as most traders liquidate their assets to buy Treasurys.


Therefore, gold prices tend to go down as treasury rates increase. As Treasury rates fall, the price of gold goes up.


For example, when the US Treasury yield rose on Thursday, March 17, 2022, gold prices fell below $1,946.

Although it reached this price again a few days later, it fell below the $1925 resistance.

technical strategies

To use technical analysis to trade CFDs on gold, make sure that your strategy matches the current market conditions. Momentum strategies tend to work well in trending markets, while range strategies work best in low volatility markets.

moving average crossover

A simple moving average (MA) is the average of the closing prices of a traded security, often over a 20-day period. Gold traders also use the 50-day and 100-day moving averages.

So how does the moving average crossover work?


When the short-term moving average crosses the long-term moving average, it is a signal of a potential long position in gold trading. When the short-term moving average falls below the long-term moving average, this is a signal for a potential sell position.


Let's take a look at the example below.


Let's say you are in a gold hypothetical situation where you are using the 100 day moving average. When the 50-day moving average crosses the 100-day moving average, you can enter a long position. Once the short-term moving average falls below the long-term moving average that indicates a potential short position.

For example, during the 2020 pandemic, gold enjoyed one of the biggest spikes, as evidenced by the moving averages cross above.


 

In April 2020, the 50-day moving average surpassed the 100-day moving average, and prices rose over a period of several months until November 2020. It was noted that gold in 2020 reached its highest levels by up to 25%.

4 things to consider before trading CFDs on gold

Here are four key things to consider before you start trading gold online:


1. Find out what moves gold

Market forces have a direct impact on the price of gold.


These forces directly affect trade volumes, trade intensity, and market sentiment for gold. They include:


Emotions (greed and fear)

Supply and demand

Inflation and deflation

government policy

Supply and demand, for example, has played an important role in the price of gold over the past couple of years.


According to the World Gold Council, annual demand for gold rebounded in 2021, recovering from many of the losses incurred during the 2020 pandemic. Due to this sharp increase in demand from institutional investors, prices of gold bars and coins jumped to levels not seen since the second quarter of 2019.


However, this was not true of every gold tool. When some shot, others fell. Take gold ETFs, for example. The increase in interest rates and inflation in Western markets made it expensive to hold, which led to an outflow of capital from gold ETFs into other assets.


Not understanding these forces can expose you to enormous market risks as a retail trader. This happens when you trade based on one feeling while, in fact, another is controlling the market.


2. Understand the market participants

Gold attracts many market participants, each with conflicting interests. In other words, everyone in the gold markets has their reasons for getting involved. Understanding these interests can help you decide how to trade gold and which gold instrument to choose.


Most of the time, investors with a bullish view of gold are at the top of the pyramid. Also called "gold bugs," these investors buy actual gold bars and other gold assets. Gold bugs usually hold long positions, sometimes permanently, and are rarely affected by downtrends.


Although their actions drive out market players in the short term, gold bugs create massive liquidity in the markets and provide opportunities for other players to exit their gold stocks and futures positions.


Gold is also an excellent hedge, and most institutional investors will use risk-off and risk-off strategies, especially in markets with less retail trader participation.

conclusion

Although there are a lot of gold trading strategies out there, you can consider starting with the ones mentioned in this article. Basic strategies help you analyze the state of the markets, and technical strategy enables you to determine when to enter and exit any golden trades.


Past performance is not indicative of future results.