What are the best strategies for trading gold?

Buying and selling gold has always been a great business opportunity. Gold is a safe haven asset, and in unstable economic times, many investors shift their interest to it. Thanks to gold futures contracts and gold ETFs trading, gold is available to anyone willing to invest. But first, you need to grasp the gold trading strategy. So if you want to speculate on its prices going up and down, or you are a long-term trader, this article is for you.

The best gold trading strategy

Here are the strategies expert gold traders recommend: silver ratio strategy, moving averages strategy, and strategy based on a symmetrical triangle pattern. 

What is the gold-silver ratio trading strategy?

The gold-silver ratio trading strategy focuses on the relationship between the prices of gold and silver. The gold-silver ratio represents the ounces of silver required to purchase one ounce of gold. Traders who employ this strategy aim to exploit the fluctuating ratio between these two precious metals. Here’s how the strategy works:

You can calculate the gold-silver ratio by dividing the price of gold per ounce by the price of silver per ounce. For example, if the price of gold is $1,800 per ounce and silver is $25 per ounce, the gold-silver ratio would be 72 (1800/25 = 72).

Traders track the gold-silver ratio over time to identify potential trading opportunities. The ratio can vary significantly, ranging from around 15 to 100 or more. When the ratio reaches extreme levels (historically high or historically low), it may suggest a potential trade setup.

The gold-silver ratio trading strategy is often based on the belief that the ratio tends to revert to its long-term average. When the ratio is at an extreme high, some traders view it as an indication that silver is undervalued compared to gold. Conversely, when the ratio is at an extreme low, it may suggest that silver is overvalued relative to gold.

Traders can execute trades based on their interpretation of the gold-silver ratio. When the ratio is high, traders may consider selling gold and buying silver, anticipating that silver’s price will potentially outperform gold as the ratio normalizes. Conversely, when the ratio is low, traders may consider selling silver and buying gold, expecting silver’s price to underperform gold as the ratio reverts to the mean potentially.

Gold Trading Strategy with Symmetrical Triangle Analysis

When using a symmetrical triangle pattern for analysis in trading gold on the financial market, you can follow these steps:

The symmetrical triangle pattern represents converging trend lines connecting a series of higher and lower highs. The pattern forms as the market experiences a period of consolidation, with buyers and sellers pushing the price towards a point of convergence.

Identify at least two swing lows and two swing highs within the price action of gold. Connect the swing lows with a trendline and the swing highs with another trendline. The trendlines should converge, forming a triangle shape.

Pay close attention to the price movement within the symmetrical triangle pattern. As the price approaches the apex of the triangle, it typically experiences a decrease in volatility. Traders watch for a breakout of the triangle pattern, which can occur in either direction.

Wait for the price to convincingly break above or below one of the trendlines of the symmetrical triangle pattern. Typically, traders look for a breakout accompanied by increased volume and a strong price move to confirm the validity of the breakout.

Calculate a price target based on the height of the triangle pattern. Measure the distance between the highest and lowest points of the triangle and project that distance in the direction of the breakout. This provides a potential target for the subsequent price move.

Implement appropriate risk management strategies when trading the symmetrical triangle pattern. Set stop-loss orders to limit potential losses if the trade does not go as expected. Adjust position sizes based on your risk tolerance and the size of your trading account.

Trading gold on the financial market using moving averages

Determine the specific moving averages to use in your analysis. Common choices include the 50-day moving average (MA) and the 200-day MA. These moving can help identify trends and potential entry or exit points.

Plot the chosen moving averages on a price chart of gold. The 50-day MA represents the short-term trend, while the 200-day MA represents the long-term trend. Determine the direction of each moving average to identify the prevailing trend in the gold market.

If the 50-day MA is above the 200-day MA and both are sloping upward, it suggests an uptrend in gold.

If the 50-day MA is below the 200-day MA and both are sloping downward, it indicates a downtrend in gold.

Pay attention to instances where the 50-day MA crosses above or below the 200-day MA. A bullish signal occurs when the 50-day MA crosses above the 200-day MA, while a bearish signal occurs when the 50-day MA crosses below the 200-day MA.

Gold trading strategy useful tips

Beware of geopolitical implications.

When there is economic uncertainty reflected in currency prices, investing in gold is a safe haven suitable for the protection of your liquidity.

Gold is correlated with the US dollar but also the Japanese Yen, British pound, and other stable currencies. Historically, gold prices tend to rise when the value of the U.S. dollar goes down — like during more inflationary periods, for example. To protect liquidity assets from unpredictable circumstances, opening an XAU/USD position can be a great option.

When it comes to interest rates, the price of gold will usually decrease when interest rates rise and vice versa. In other words, Gold often has an inverse relationship with interest rates.

Track supply and demand for gold.

Increased demand can affect gold prices, given the scarcity of gold as a material. Medical and tech industries use gold in various products and solutions. Consumer demand in foreign markets such as India can largely affect its price. Therefore, it’s advisable to follow the seasonal patterns related to the demand for gold.

Pay attention to changes in gold production.

Over the last few years, there have been no significant changes in the field of gold mining. This lack of change is not due to a lack of demand for gold. 

Despite the fact that the demand for gold remains high and mining production has increased in recent years, the costs associated with accessing underground gold reserves in remote locations have risen. 

The most easily accessible gold reserves, which are currently known, have already been mined and added to the global supply. This means that the remaining gold reserves require more expensive mining operations, resulting in reduced profit potential for mining companies.

However, a limited amount of gold being produced does not indicate that there will be a decline in its value. 

In fact, it is quite the opposite: if gold production remains stable, it could create a high demand for the precious metal and result in increased prices. 

This is especially true if central banks and other regular buyers of gold begin to seek out this asset actively. While the price of gold is influenced by different factors compared to traditional forex currencies, many of the same principles for evaluating forex currencies still apply. 

Therefore, forex traders should view XAU/USD as a reliable and secure investment option, as well as a potential source of profit, if they can effectively analyze the price movements of gold and develop a trading strategy to take advantage of this opportunity.

How and where can you start trading gold?

It’s easier than ever to start trading gold. Just find a reliable trading platform and open an account. Before making your first real investment, try trading on a demo account. Demo gold trading account is for practicing and/or developing trading skills with virtual assets.