In order to choose the best way to trade you need to understand how exactly the pair behaves in the market. If you look at the chart with any timeframe you will notice strong intraday fluctuations within a range. This is due to the low liquidity of the instrument and this will eventually form the basis of our trading strategy.
So what should you look for? Let's take the chart with the H1 timeframe as a basis. Look for a sharp growth and then a reversal of quotes. This is your chance to trade against the trend. To confirm the signal, look for a candle with a long tail and open a trade in the opposite direction. Another confirmation of the transaction should be a false breakout of the sideways range by the tail of the candle.
Next, you need to decide on key price levels:
- Set Stop Loss around the tail of the candle that has made a false breakout.
- Take Profit is set, as a rule, after the next 2-3 candles that outline the maximum range of the local trend.
Range Breakout Strategy
Since gold often impulsively moves in the sideways range, the main method of trading this instrument is using the breakout strategy. This method is most suitable for impulse traders with quite a lot of trading experience. You see, the strategy is based on the correct determination of the upper and lower borders of the flat range and the setting of pending orders in these areas. Usually, only more advanced traders are capable of such manipulations.
For this strategy, the main levels are set as follows:
- Stop Loss is placed right above or below the border of the range opposite from the entry point of the trade.
- Take Profit is set under or above the entry point in the direction of the trade at a distance equal to the width of the set flat range.
A Few Additional Tips
In the previous article, we already mentioned that the optimal time for gold trading is the interval between 12:00 and 17:00 GMT. Always remember that while trading.
If you want to use the classic gold trend trading strategies, then use the charts with a timeframe of at least D1 since day candles form the main trend of XAUUSD. Remember, however, that the fluctuations in this instrument are much higher than on other currency pairs. If you don’t want your trades to endlessly close by Stop Loss, set the levels much further. To facilitate the process, you can use the Average True Range (ATR) indicator. It will show you the perfect place to set your Stop Loss.
Also, remember about the fluctuations if you use level trading. For the XAUUSD pair, levels are more of pretty wide ranges which differs from other currency pairs.
The Analogue of the “London Explosion”
One of the easiest but very effective ways to make money on gold is to use the strategy of the “London explosion”. Or better say the “American Golden Explosion”. Taking into account the periods of the highest and lowest activity of gold, you can use the breakout strategy even without special skills. We will use the H1 chart.
The main steps of the strategy:
- Find the flat range of price movement in the interval from 11:00 to 11:30 GMT. Take it as a basis for determining the main price levels.
- Open Sell Stop and Buy Stop pending orders in both directions below and above the established flat range.
- The Stop Loss level is set on the border of the flat range, opposite from the entry point of the transaction.
- Take Profit is set at a distance of the width of the established flat range.
- Around 12:00 GMT, when the volatility on the chart rises, one of your pending orders will be executed. This may happen a little earlier or later. Do not panic.
- Wait for the closing of your transaction by Stop Loss or Take Profit.
- If at 17:00 GMT your position is still open, close it regardless of its results.
Obviously, these instructions are not a clear call to action. You can make adjustments to it based on your trading plan. The main thing is to take into account the main features of gold behavior before making any changes.
To Summarize
The XAUUSD pair is significantly different from trading in other currency pairs. If you want to succeed, then you need to consider all the features of this instrument.
When choosing gold, remember the main points:
- The periods of the highest activity of the pair during the day and week
- Correlation with Chinese yuan, platinum, and silver
- Impact of the major US economic news
- Fast execution of Stop Losses due to impulsive behavior of quotes
This concludes our Gold Trading Series. I hope that you will find here answers for all your questions and start to get real profit on the XAUUSD pair.