Excerpt: Are you interested in trading the yellow commodity? Forex4you will provide you 6 tips for gold technical analysis, which each beginner or novice should know.
Gold is a commodity that can be traded on the spot market just like currencies. It has traditionally been used as a store of value, because it is not controlled by any central bank like the currencies. Also, gold is not also influenced directly by the monetary policies of any government. It is therefore used as a ‘safe-haven’ commodity together with assets like the Swiss Frank (CHF) and Japanese Yen (JPY). When trading Forex, it is possible to trade one currency pair against another, like CHF against Yen or other currencies. Yet, this is not possible when trading Gold, since the commodity is denominated in the US Dollar. Therefore, it is important to take the price movement of the US dollar into consideration for gold technical analysis.
Is trading gold similar like trading Forex?
Yes, it is similar. Just like forex trading, traders use different approaches like fundamental, technical or sentimental analysis. Some traders use a combination of two or three of these analytical methods to develop their personal approach to the Gold market. In this article, we will discuss about only the technical analysis part and will assume users already understood some basics of technical analysis like lines, indicators and other. If not, then please read also the basic guide on technical analysis (Hyperlink to the first article: Technical analysis course for beginners). Technical analysis traders also have different methodologies or a combination of methodologies that make up their trading systems. Some use indicators or combination of indicators, for example trend following indicators and oscillators. Some traders use price patterns, candles patterns, Elliott wave patterns, harmonic patterns etc. Next, we will dive into the 6 tips and steps, which a gold trader can take into consideration when executing gold technical analysis and determine whether he/she should trade.
6 Tips for Gold Technical Analysis and Trading
1. Identify the long-term trend
The trend is your friend. So firstly, it is important to always check the long-term trend of Gold. No matter which trading style you use, and if you also incorporate fundamental analysis in your trading strategy, a gold trader needs to check on the different long-term time frames the overall trend of Gold. A thumb of rule for using multiple timeframes for a swing traders could be the combination of Weekly/Daily/H4. Whereas for intraday traders, they can look at the combination of H4/H1/15mins.
2. Identify if the trend is making corrections in the other direction
The second step or tip, is to look on weekly timeframe and check if the trend of the commodity is making any corrections to the other direction in the medium-term, below is an example:
The XAUUSD Weekly chart shows clearly that the prevailing trend from 2011 is bearish. Bearish trends are made of of lower lows and lower highs. However, a bullish correction has started on the weekly chart, as the last high (H) on the bearish trend was broken upside. The bullish correction could continue. Therefore, you would like to reassess your entry/exit points and adopt your trading strategy to possibly a bullish trend.
3. Identify important price levels on the daily/weekly time frame
Thirdly, it is important to determine on the smaller timeframes, the levels of resistance/support. Using the same scenario in tip 2, the chart below, it is vital to plot the resistance level, to see where price could react on its way up.
The nearest level is 1376-1375. This price zone was formed in July 2016 and also served as a resistance throughout the first quarter of 2018. Price is going toward the same zone in 2019 and it remains to be seen if it would break above it this time around. If price does bridge above it, the next resistance level of interest is 1525.
4. What is the intermediary trend?
Once the resistance and support lines are plotted on the weekly timeframe, the next step is to analyze the intermediary trend on a shorter timeframe, namely daily timeframe. From the daily time frame below, we can clearly see that the intermediary trend is bullish and that can be confirmed when looking at the smaller timeframe; H4 chart as well.
On the daily chart, the immediate trend is bullish. The trend lasted to 1346 with series of higher highs and higher lows that characterize a bullish trend. When this sequence was interrupted with a lower low, a bearish correction started with lower lows and lower highs. The bullish trend resumes when the bearish correction sequence was interrupted with a higher high. Where do you think price is going and in what direction would you be seeking trading opportunities? The answer is of course on the upside. The next thing is to identify the next high and low. There are resistance levels at 1346 and 1376, which are potential places for the next high or profit targets, if a new low is formed before the levels. Bear in mind that the bullish trend will be hugely interrupted if price breaks below the rising trend line.
5. Use reversal signals for trading gold
There are many technical methods that help identify reversal signals when trading gold, similar like when trading Forex. This include momentum indicators like MACD and oscillators like RSI and stochastic oscillator especially their divergence signals. Others include candlestick reversal patterns like engulfing patterns, evening/morning star, hanging man, pin bar/hammer/inverted hammer, reversal chart patterns, Elliott wave, harmonic patterns etc.
6. Double-check your stop loss and entry/exit points
Always double check if you put a protective stop loss, after you have determined your entry and exit points. It might sound strange, but many traders make silly mistakes by forgetting their stop loss, so avoid such simple mistakes by automatically double checking your stop loss and your entry/exit points. Do you have other tips for gold traders? Share them with us in the comments section below. For more education on gold trading or Forex, visit Forex4you’s website to get all the courses, tutorials, trading tools and more.