Another geopolitical influence on exchange rates, gold, has gained popularity in recent years. Traders can use gold as a means of hedging other assets or as a safe haven asset that offers consistency over time and is more resilient to dramatic valuation swings than many other currencies.
XAU/USD is one of several gold pairs that forex brokers are now offering, making it easier than ever to incorporate gold as part of your forex trading strategy. The stability of the price of gold over time makes it an important asset even during periods of inflation like the one we are experiencing today.
As the COVID-19 pandemic rocks the global economy, foreign governments and savvy FX traders are shifting more money into gold as a guarantee against inflation losses. Economic practices such as printing more money can weaken global currencies and cause their value to decline relative to stable assets like gold.
Gold’s stability is largely due to its relatively constant global volume, which cannot increase dramatically the way governments can print more paper money. If you want to make better use of gold and take advantage of potential profit opportunities, consider the following nine trading tips.
1st New York trading day in mind
Gold is a nearly 24-hour market, but the highest liquidity is usually found during New York trading hours. Whether you should aim for trades during or after New York trading hours depends on your goals.
While trades offer high liquidity and low volatility during peak activity, making them good targets for safe-haven trades, off-hours trading can provide the additional volatility needed to execute speculative strategies. At the same time, this added volatility increases the relative risk of each trade.
2 . Simplify analysis by targeting previous highs and lows
Since XAU/USD tends to trade in a range, one of the simplest strategies is to identify buying or selling opportunities within the trading pair’s previous highs and lows. For example, traders can open a position on gold when it is in an uptrend and sell at a previous high, or vice versa.
Since gold is a relatively stable asset, over time it is likely to hit these previous highs or lows. Note that this is not a good strategy for day trading as it can take time to reach these goals, and range-bound strategies typically do not provide quick profit opportunities like momentum strategies. However, it is a relatively low-risk strategy designed to earn some profits from reliable XAU/USD price action.
- Consider the geopolitical implications for currencies
When political or economic uncertainty raises concerns about exchange rates, gold can be a stable safe haven asset that protects your liquid assets.
Gold tends to be highly correlated with the US dollar as well as other stablecoins like the Japanese yen, and opening a position with XAU/USD can be a reliable way to protect your assets from unexpected situations affecting other currency markets.
- Use the symmetrical triangle to analyze
A symmetrical triangle is a simple chart pattern that indicates a consolidation phase that can lead to a price breakout. Symmetrical triangles are characterized by the convergence of two trend lines progressing on a similar slope but in opposite directions. As the consolidation occurs, price action narrows on the pair creating a potential trading opportunity on the breakout.
Most traders use the symmetrical triangle pattern in conjunction with other technical indicators such as liquidity or the relative strength index. When other indicators are pointing to a possible price breakout, the symmetrical triangle can add further confirmation and increase confidence in placing an order on XAU/USD.
A stop-loss order can be placed just below the descending trendline after the two trendlines converge, and sell orders can be placed when the price of the gold/dollar pair has been successfully broken.
- Tracking industrial and commercial demand for gold
Increased market demand for gold can affect prices due to the constant global supply of the material. The request can take many forms. Some industries may change their gold holdingsincrease due to the role of materials in consumer projects. For example, both the medical and technical industries use gold in certain products and solutions.
- Central Bank Purchasing Supervision
Central banks tend to buy gold as a hedge if they anticipate the volatility of certain currencies. China and Russia, for example, made headlines recently for making significant investments in gold, reflecting their concerns about the future price of the US dollar and euro, as well as other major global currencies.
When central banks start buying gold in bulk, it tells forex traders two things. First, governments are acting on the belief that the values of major currencies could fall, which could encourage traders to reallocate a larger percentage of their investments into less volatile funds.
Second, increased purchases by central banks usually lead to rising gold prices – at least in the short term. When gold prices start to rise, this could be an opportunity to make a quick profit.
- Keep an eye on real interest rates
Gold has a well-documented relationship with real interest rates, with prices rising when interest rates fall and prices falling with higher interest rates. The real interest rate is determined by subtracting the inflation rate from the nominal interest rate, giving a gain or loss in a percentage that takes inflation into account.
Historically, gold prices tend to rise when the real interest rate falls below 1%. By watching this interest rate change over time, you can spot a solid buying opportunity – especially if you’re looking for long-term trading opportunities.
In contrast, a real interest rate above 2% is likely to cause the value of gold to fall. Many experts will recommend selling XAU/USD when real interest rates get that far.