Gold Trading Tips
Some say that gold is one of the most difficult markets to trade and there is some truth to that – gold doesn’t move like other markets and if investors want to be successful trading it (and it can be very rewarding), they have to keep several things in mind. Over the years of monitoring and analyzing the gold market we noticed many profitable rules and patterns. We successfully applied them and are still applying them for our precious metals trades and we will share our knowledge on this page. It took years of analyzing, testing and using our own capital to make sure that these points are really useful. The tips that you find below should make trading gold easier and much more profitable.
- Keep the sizes of your gold, silver and mining stock trading positions small. The higher the chance of being correct, the bigger the position can be (that’s why ).
- Pay attention to and – many markets have cyclical nature (for instance the USD Index and silver) and cycles can be a great help in the case of short- and long-term trades.
- Check the efficiency of each that you want to use on the gold market (or other markets) before applying it and trading real capital based on it.
- Consider using and Stochastic indicators for gold, silver and mining stocks as they have proven to be useful over many years. Other indicators can be useful as well, but be sure that you examine them before you decide to make trading decisions based on them.
- If a given indicator works “almost as well” as you’d like it, but you see that it has potential, don’t be afraid to modify it. For example in case of RSI, you see good selling opportunities when this indicator moves to 65 or so instead of the classic 70 level) then it can be useful and profitable to either add additional overbought / oversold level, breaking which would generate a signal (in this case a sell signal) or to change the parameters of the indicator, deviating from the standard values.
- Use only if they have been working for a given market in the past – if a given market has been ignoring a certain moving average, most likely so can you.
- Keep track of the price – in our opinion its best to use as expiration of derivatives can also have an important impact on the price of gold, but if you can’t get access to them, it’s better to use regular seasonality than none at all.
- Use lines and trend channels – they have often proven useful as support and resistance lines / levels in the case of gold, silver and mining stocks. The more significant lows or highs are used for creating a given trend line or channel, the stronger the support or resistance is.
- The previous highs and lows can and often serve as / levels as well – in the case of the precious metals market, the strength of the support / resistance is strength of the support / resistance created as rising or declining trend lines. The more significant the high or low is, the stronger the resistance or support.
- Note that markets have not only a cyclical nature, but a fractal one, too. The rallies and declines are , which means that price patterns that we saw on a bigger scale are quite likely to be seen on a smaller scale (proportionately). This observation can be of great help when determining how low or how high gold, silver or mining stocks will move. We have a tool – the – that can help determine the similar sessions in their advanced mode, but even if you choose not to use it, be sure to be on the lookout for the self-similar (if the current price move is similar to the previous ones, it’s quite likely that the final part of the pattern – that’s still ahead – will also be similar, which allows you to position yourself to take advantage of it).
- Pay attention to . The volume is a very important, yet often overlooked, piece of information. If a rally is accompanied by rising volume, then it’s likely a start of an even bigger rally. If a rally is accompanied by low or visibly declining volume, then it’s likely ending. If a decline is accompanied by high or rising volume (unless there is a day when the price visibly reverses), then the decline is likely to continue. If a decline is accompanied by low volume, then there are no meaningful implications (yes, the situation is not symmetrical in this case). The above are general guidelines, and before applying them to the current market situation, be sure to check if the above (the part of the above that currently represents the situation on the market) really worked in the way above – if it didn’t, then it’s generally better to expect the same type of reaction that previously accompanied a certain price/volume pattern.
- Look for price formations (like a ), but before you apply them (believe that a certain formation is “in play” and likely to cause a certain move which would cause you to enter or close a given trade) be sure to check if this kind of formation worked on this market previously. For instance “breakouts” (which are not a formation by themselves, but this example illustrates what we mean) in silver have quite often resulted in price declines (breakouts were invalidated) instead of rallies, so their real implications were the opposite of what one might have expected based on the classic definition of a breakout.
- Wait for confirmations. It’s usually best to wait for breakouts / breakdowns confirmation before taking action. In the case of the precious metals market, based on our experience, it’s worth waiting for three consecutive closing prices below / above the critical price level before viewing the breakout / breakdown as “confirmed” and thus meaningful. Invalidation of a breakout is a bearish sign and invalidation of a breakdown is a bullish sign.
- Analyze more than the market in which you want to trade. In today’s global economy no market can move totally independently. Gold and the rest of the precious metals sector are no exception – their price moves are often linked to the , , interest rates, Fed’s comments, and performance of and are just the most important ones. Be sure to check what markets were moving in tune or in the opposite direction to gold before and make sure that their impact is likely to be supportive of the trading position that you are about to open. For example, if gold was moving in the exact opposite to the USD Index and you’re considering opening a long position – if you see that the USD Index is very close to a major resistance level and it’s already heavily overbought, then the odds are that the USD Index will top and contribute to or even trigger gold’s decline.
- Analyze ratios. Of course, not just any ratios – the ratios that have proven to provide important signals for gold (like the gold stocks to gold ratio or – they both have a history of leading gold, but this has not been the case during the post-2011 decline), that are important due to fundamental factors (gold vs. bonds ratio – both can be seen as safe-haven assets and major bottoms and tops in this ratio take place along with major tops and bottoms in gold, so it can be used as a confirmation) or because they are often discussed (). Sometimes ratios can be utilized to see something from a non-USD perspective (gold to UDN ratio is the weighted average of gold priced in currencies other than the US dollar, with weights as in the USD Index – this ratio can be used to confirm major moves in gold or suggest that these moves are just temporary as they are only visible from the USD perspective).
- Analyze other time-frames than the one that you’re focusing on. Even if you are placing a short-term trade, be sure to check the medium- and long-term trend. Generally, the longer the time frame, the stronger the support and resistance levels, so even if you analyzed the short-term picture, it can be the case that a given move will be stopped by a medium- or long-term resistance. If you’re focusing on the medium- or long-term trades, the short-term picture can help you fine-tune the moment of entering or exiting the market.
- Be on the constant lookout for anomalies. When you see something odd, investigate and find the reason behind it and check if anything similar happened previously – if yes, check what happened next. If similar things were always followed by the same kind of price pattern in gold, silver and/or mining stocks, it might be a good idea to trade it. If not, then perhaps the reason behind the anomaly resulted in something else that had a more specific effect on the precious metals prices.
- Monitor investor sentiment. If the vast majority (!) of precious metals investors and traders are bullish, then gold is likely close to a top (in this case it makes sense to look for selling signals and / or confirmations that the top is in and – if they are present – exit long positions and / or enter short ones). Conversely, if everyone and their brother is bearish on the market, then a bottom is very likely close to being in or already in. The ways to estimate sentiment include checking how often people look for gold-related terms (like “gold stocks”) in , monitoring outcomes of surveys with questions like “where will gold price be in 3 months” and similar queries, and also checking the traffic of gold-related websites on . On a side note when you see that a certain, big gold-related website is very slow or crashes after a big move up or down, then it likely means that the traffic / interest in gold was enormous, which is another way of detecting that a major price extreme is well-nigh (we saw that in 2011 when gold topped).
- Even if your primary approach is to trade gold, we still encourage you to consider dedicating a part of the capital to long-term investments – it should lower the overall variability of your returns and making gains more stable. There are also other benefits that we outlined in our very . Our includes a sample portfolio for “Trader John”, which might serve as an example (of course, it’s not investment advice) of how traders could structure their portfolios and benefit from diversified strategies.
- Before you decide to follow a given , be sure to check how long they have been in the business and if they are known for their good performance.
- If you do decide to follow someone, it’s usually a good idea to stay with them even if they happen to be incorrect about the market one or even a few times in a row as markets are sometimes moving almost randomly (they are emotional, not logical in the short term) and everyone has to be incorrect eventually (that doesn’t necessarily imply following what they do using your capital – it means monitoring their performance to see for yourself if they can grow your capital over time).
The above is not a 100% complete list of what we discovered on the topic of (we can’t provide all the details publicly – we can’t cover the details behind our in-house-developed ), but it includes the majority of things that we found to be very useful over and over again.
If you found the above list useful and / or you would like to learn more about trading precious metals and other markets we invite you to sign up for our free mailing list. Once you sign up, you’ll receive 7 days of access to our daily Gold & Silver Trading Alerts and you’ll be able to see how we use all the above live.
Przemyslaw Radomski, CFA
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