3 Popular Gold Trading Strategies When Trading Gold CFDs

Let’s look at two fundamental strategies and one technical strategy that you can use to buy and sell gold when trading in the financial markets. This article will also touch on things to consider before trading gold.

Fundamental Strategies

Fundamental trading strategies measure the intrinsic value of gold by its economic and financial factors.

1. Seasonal Gold Patterns

If you’re a short-term trader, one of the best fundamental gold trading strategies you can use is to follow seasonal patterns. One of the beauties of trading gold is; gold follows a seasonal pattern and tends to rally during some months.

During these months, gold prices have an above-average price. 

2. Inverse Gold Prices and US Treasury Rates

Using US Treasury rates can be an alternative fundamental strategy if you have a long-term trading outlook. US Treasury rates usually trigger an inverse response from gold prices as most traders will liquidate their assets to purchase treasury bonds.

So, gold prices tend to move downwards whenever the treasury rates increase. Whenever the Treasury rates decrease, the price of gold increases.

For example, when the US treasury yield rose on Thursday, 17 March 2022, the gold prices dropped below $1946. ^[1]

Although it hit that price again a few days later, it dropped below the resistance at $1925.

Technical Strategies

To use technical analysis to trade gold CFDs, ensure your strategy matches the current market conditions. Momentum strategies tend to work well in trending markets, while range strategies work best in low-volatility markets.^[2][3]

The Moving Average Crossover

A simple Moving Average (MA) indicator is the average closing prices for a traded security, often over 20 days. Gold traders also use the 50-day and 100-day MA.

So how does the Moving Average Crossover work?

Whenever the short-term MA crosses the long-term MA, that’s a signal for a possible long position on a gold trade. Whenever the short-term MA falls below the longer-term MA , that’s a signal for a possible short position.

Let’s look at an example below.

Let’s say you’re in a hypothetical gold position as you use the 100-day MA. Whenever the 50-day MA crosses the 100-day MA, you could take a long position on the trade. Once the short-term MA falls below the long-term MA that signals a possible short position.

For example, during the 2020 pandemic, gold enjoyed one of the biggest rallies, as shown by the MA cross above. ^[4]

  
In April 2020, the 50-day MA crossed the 100-day MA, and prices soared over several months until November 2020. Gold in 2020 was observed to hit highs of up to 25%.^[5]

4 Things to Consider Before Trading Gold CFDs

Here are four key things you should consider before trading gold:

1. Find Out What Moves Gold

Market forces have a direct impact on the price of gold.

These forces directly affect the trade volumes, trade intensity, and market sentiment of gold. They include:

• Emotions (Greed and Fear)
• Supply and Demand
• Inflation and Deflation
• Government Policy

Supply and demand, for example, have played a significant role in the price of gold over the past couple of years.

According to the World Gold Council, the annual demand for gold rebounded in 2021, recovering from many of the losses incurred during the 2020 pandemic. Because of this sharp increase in demand from institutional investors, the prices of gold bars and coins shot up to levels not seen since the 2nd quarter of 2019.^[6]

That wasn’t true, however, for every gold instrument. As some shot up, others dropped. Take Gold ETFs, for instance. An increase in interest rates and inflation across western markets made it expensive to hold them, leading to an outflow of capital from Gold ETFs into other assets.

Failure to understand these forces can expose you to massive market risk as a retail trader. That happens when you trade on one sentiment when, in fact, another controls the market.

2. Understand the Market Participants

Gold attracts multiple market participants, each with opposing interests. In other words, everyone in the gold markets has their reasons for participating. Understanding these interests can help you determine how to trade gold and which gold instrument to choose.

Most times, investors with a bullish outlook on gold are at the top of the pyramid. Also called ‘gold bugs,’ these investors purchase actual gold bullion and other gold assets. Gold bugs traditionally hold long positions, sometimes perpetually, and are rarely shaken by downtrends.^[7]

Although their actions elbow out shorter-term market players, gold bugs create enormous liquidity in the markets and provide opportunities for other players to get out of their gold stocks and futures positions.

Gold also makes for an excellent hedging instrument, and most institutional investors will use risk-on and risk-off strategies, especially in markets with lower retail trader participation.

3. Observe for Long-Term Gold Trends

Gold has a rich history. Take time to go through historical gold charts and understand its behaviour over the past century. 

Trend watching can help you identify patterns that gold has followed over recent decades. 

4. Choose Where to Trade

Once you understand these three factors, you can choose where to trade. Doing this provides you with an opportunity to select a gold CFD instrument to trade and plan your entry and exit points.

At the same time, liquidity follows gold trends, especially during upwards or downward movements. Markets with lesser participation are less liquid and have much lower participation rates. Often, they’ll force higher trading costs on you through slippage.

Conclusion

Although there are plenty of gold trading strategies, you can consider getting started with the ones listed in this article. Fundamental strategies help you analyse the status of the markets, and the technical strategy enables you to time your entry and exit out of any gold positions.

Past performance is not an indication of future results.

Reference

1.  “Gold – 2022 Data – 1968-2021 Historical – 2023 Forecast – Trading ….” https://tradingeconomics.com/commodity/gold. Accessed 8 Apr. 2022.
2. The Trend is Your Friend: Time-Series Momentum Strategies Across Equity and Commodity Markets. (2022). Retrieved 5 May 2022, from https://www.research.manchester.ac.uk/portal/files/39718724/The_Trend_is_Your_Friend_Time_Series_Momentum_Strategies_Across_Equity_and_Commodity_Markets.pdf
3. How to build a winning range-bound trading strategy. (2022). Retrieved 5 May 2022, from https://www.investopedia.com/ask/answers/011215/how-do-i-effectively-create-rangebound-trading-strategy.asp
4. “XGDU Stock Fund Price and Chart – TradingView.” https://www.tradingview.com/chart/?symbol=TVC%3AGOLD. Accessed 8 Apr. 2022.
5. “Gold Investment Return Rate 2021 | Statista”. Statista, 2022, https://www.statista.com/statistics/274002/return-on-gold-as-an-investment-since-2002/.
6. “Gold demand hits highest level in more than two years.” 28 Jan. 2022, https://www.gold.org/news-and-events/press-releases/gdt-full-year-2021-press-release. Accessed 8 Apr. 2022.
7. “Gold Bug Defined – Investopedia.” https://www.investopedia.com/terms/g/goldbug.asp. Accessed 8 Apr. 2022.