How to Trade Gold? Top Gold Trading Strategies and Tips

Statistics from the World Gold Council indicate that over $160 billion worth of gold is traded every day across the globe.

Both individual and institutional traders study the market and develop advanced systems and approaches that aim to take advantage of the precious metal’s price swings to turn a profit.

To practice gold trading successfully, you must learn a few strategies that increase your odds of predicting its next moves.

In this article, we will share 5 of the most popular gold trading strategies. All of these approaches will produce concise buy and sell signals that you can follow. Although none of them is 100% accurate, they all offer a systematic approach to trade gold through the use of technical analysis.

Which Economic Drivers Move Gold?

Several factors can influence the price of gold over time. From interest rates to geopolitical tensions, the following five elements are closely monitored by traders to predict where the price of XAUUSD may be headed next.

#1 – Interest Rates

Gold prices are heavily influenced by the monetary policy decisions of top central banks like the Federal Reserve. When these institutions adopt expansionary policies (lower rates), the price of gold tends to increase amid fears that inflation will increase as a result of these decisions.

The opposite is true if interest rates start to rise and the U.S. dollar strengthens as yields of relatively safe fixed-income products like U.S. Treasury bonds become more attractive and the opportunity cost of holding gold is higher.

#2 – Inflation

High inflation erodes the purchasing power of fiat currency. When countries experience a spike in inflation rates, investors turn to gold to protect their wealth. Higher demand results in higher prices in the near term.

From January to May 2021, right after the pandemic pushed the Federal Reserve to lower its interest rates near zero, inflation started to increase. By the end of June, it was already standing at 5.4%. Meanwhile, during that same period, the price of gold rose by 3.2%.

#3 – Geopolitical Tensions

War drums often unsettle global markets and bolster gold (XAUUSD), as this precious metal is widely accepted as a safe haven asset irrespective of geopolitical turmoil. Moreover, military conflicts frequently drive up budget deficits, leading to higher inflation and a sustained erosion in the purchasing power of fiat currencies.

Top 5 Gold Trading Strategies

Five gold trading strategies stand out amid their high chance of producing a positive result and their simplicity – which makes them suitable for novice traders who may lack the experience or knowledge to develop sophisticated proprietary systems or indicators.

Trend reversals

Trend reversals occur when the market’s sentiment changes from bearish to bullish or vice versa, causing the prevailing trend (either upward or downward) to change course.

In the chart above we see how the price of gold was engaged in a downward trend as it made as much as five consecutive lower highs. During this period, the price also made several lower lows.

The earliest signal of a trend reversal occurs when the price breaks above the upper trend line (the opposite would be the case if it is an uptrend reversal) and then the reversal was confirmed when the price surged above the latest lower high.

Double-top & Double-bottoms

Double tops and double bottoms are among the most reliable gold trading strategies. They occur when the price action bounces off a key resistance (top) or support (bottom) area.

This technical event indicates that buying interest (for double bottoms) is quite strong at that price level, and the market interprets this as a buy signal.

The opposite occurs for double tops, as market participants interpret them as a strong signal that buyers are not willing to pay the price above that mark and capitulate once the asset gets there.

In both cases, the result is a sharp bounce off that level. In the chart above, we see a double-bottom pattern unfolding. The earliest signal is sent when the price bounces off the support area for a second time in a relatively short period and skyrockets to the most recent peak.

Confirmation of this pattern occurs when the price breaks above that latest high. At that point, short-sellers typically capitulate and are forced to cover their positions, and a buying spree propels the price to higher levels.

Above there is an image of how a double-top pattern would look like. In this case, the pattern has a bearish bias and it would be confirmed once the price moves below the latest higher of the preceding uptrend.

Price Bounces Off Key Support or Rejects Move Above Key Resistance

When the price of gold bounces off a support area or rejects a move above a resistance line it indicates that either buyers are not willing to pay a higher price (resistance rejection) for gold or that they are willing to grab the precious metal at its current price level en-masse as they see the latest drop as an opportunity to bargain hunt (support bounce).

Support bounces like the one shown in the chart above occur when buyers show up to push the price above the support level and manage to close the session at a higher point.

If you rely on support bounces or resistance rejections to trade gold, keep in mind that they have the highest odds of delivering a positive outcome if these levels have been touched multiple times in the past and market participants have refused to push the price off those areas successfully.

These kinds of moves are confirmed if the price surges above its latest high (for support bounces) or the latest low (for resistance rejections). Trading volumes typically rise above the average during the session when the support area is touched.

Relative Strength Index (RSI): Bullish Divergence

The Relative Strength Index (RSI) is a technical indicator that measures the momentum of gold’s price by analyzing how the price has behaved in the past 14 days and how the current trend is behaving compared to that.

The RSI has two bounds. When the oscillator crosses the upper bound (70) and moves to around 80 or above, traders consider that the asset is “overbought” and is due to experience a significant correction.

The opposite occurs when the RSI moves below its lower bound at 30. If the oscillator moves to 20 or lower, traders consider the asset “oversold” and they expect a trend reversal soon.

Another more advanced way to identify buy and sell signals is by using the RSI divergence. When the price is downward but the RSI keeps making higher lows, this setup is called a bullish divergence.

Bullish divergences indicate that even though sellers have dominated the price action lately, this wave of negative momentum is weakening. Technicians interpret this as a sign that sellers may soon capitulate and a trend reversal is poised to occur.

The 1-hour chart above shows how gold prices kept dropping from around $2,600 to $2,500 but as they fell, the RSI readings started to post higher lows. This means that even though the downtrend continued, this wave of negative momentum was losing steam.

Bullish divergences are confirmed when the closest resistance area is broken. This is the best entry for this kind of setup as bullish and bearish divergences have lower odds of delivering a positive outcome than the past three gold trading strategies.

Relative Strength Index (RSI): Bearish Divergence

The opposite occurs when the price of gold is rising but the RSI starts to make lower highs. This is typically an indication that buyers may be exhausting their ammunition and could be getting ready to capitulate.

A bearish divergence is far more common than a bullish one. However, similar to their bullish peer, they are not as reliable as other signals. In most cases, RSI divergences are used as additional confirmation of other high-probability patterns like double tops and double bottoms.

As a result, the price could be poised to drop as sellers identify this weakness and start to offload gold. The best entry for a bearish divergence is when the price drops below a key support.

In the chart above, we see a clear drop in the RSI reading despite the price of gold surging from $1,660 to $1,680 in a relatively short period. The result was a significant drop that broke below the $1,580 support area and pushed gold to around $1,450 less than a week later.

Which Are the Best Financial Instruments to Trade Gold?

Gold can be traded via different financial instruments, including exchange-traded funds (ETFs), futures, and contracts for difference (CFDs). Here’s an overview of how each of these vehicles works.

• Gold ETFs: These investment funds invest in physical gold or derivatives that track the price of the precious metal. Traders can buy ETFs like the SPDR Gold Shares (GLD) and the iShares Gold Trust (IAU) to open a long position on XAUUSD while most brokers support short-selling for these instruments as well via margin accounts.
• Gold Futures: Futures give the holder both the right and the obligation to buy the underlying asset – in this case, gold – at the strike price when the contract expires. Futures are a financial derivative and their price may deviate from the spot market price under certain circumstances. This makes them the least desirable choice for novice traders.
• Contracts for Difference (CFDs): These derivatives allow investors to open either long or short positions on gold based on their predictions for gold without the need to get direct exposure to the underlying asset. When a trader opens a CFD position, they benefit from the price difference between the opening price and closing price. Through the use of leverage, these instruments allow investors to increase their exposure to gold by expanding the size of their positions.

You can explore our list of best brokers to trade gold CFDs here

5 Gold Trading Tips to Improve Your Results

The gold trading strategies in this article typically produce a high win rate as long as traders are disciplined enough and implement adequate risk management strategies to protect themselves from large losses that could wipe out their entire account balance in just a few trades.

These five trading tips will help you tilt the odds in your favor and will prevent you from falling prey to the typical pitfalls that traders face when they are getting started.

1. Always use stop-loss orders: This is a type of trade order that is automatically executed when the price reaches a certain level. With stop-loss orders, traders can limit the maximum loss they will experience in each open position.
2. Don’t risk all of your capital on a single trade: No matter how experienced you are or how good your system is, nothing justifies risking your entire account balance or even 25% of it on a single trade. Position sizing is a key risk management tool and most seasoned market operators recommend that the maximum loss you can take on every single open position should not exceed 10% of your account balance.
3. Execute the trades that offer the highest risk/reward ratio: Make sure that the risk-to-reward (R/R) ratio of your trade makes sense. Based on your entry and exit prices, you can estimate how much money you will lose if the stop-loss order is triggered and how much you would make if the price gets to your take-profit level. A 1.5 to 2 times R/R ratio is ideal in most cases. This means that you will make from $1.5 to $2 per every $1 you are risking.
4. Stick to your system: If you have already identified a good-performing trading system or technique that is delivering good results, don’t settle for anything less than the trading signals that have worked thus far. If there are no opportunities that match your system’s criteria, close your laptop, take a nap, and come back later.
5. Keep a trading journal: Trading journals are good to keep track of your progress and meditate on your past mistakes and successes. You can record things like entry price, price pattern or strategy used, profit & loss (PnL), outcome (win or loss), and observations about what went wrong or what could be replicated in the future to succeed.

Bottom line

Trading gold successfully and profitably involves developing a systematic approach that starts with learning how technical analysis works and how it can be used to identify buy and sell signals.

Any system can deliver a decent win rate. However, the most critical part of trading is staying disciplined and not falling for the usual psychological traps that traders face like failing to use stop-loss orders, chasing the trade, averaging down or up, and overtrading.

Learning these strategies is the first step in your trading journey. Keep learning, especially from your mistakes, and don’t give up. You will progressively get better as you fine-tune your skills and learn what to do and what not to do. Best of luck!