Welcome back to our gold trading marathon. We have already talked about the precious metal itself - we learned what affects its price and discussed its main trend. Time to learn more about the trading instrument itself and about the main trading features.
What is XAUUSD?
On Forex, gold is called XAU. This is a three-letter designation according to ISO 4217, consisting of the letter X and the metal designation in the periodic table - Au. The metal exchange rate is the cost of 1 troy ounce of gold in US dollars. It’s a four-digit number with 2 decimals.
Investors and traders sometimes call gold a "safe haven" because of it's stability. Gold's global volume can not be dramatically increased as the currency of any country when a government decides to print more money.
Cost of Pips
How to count pips on gold? The easiest way to count the gold points is to take numbers after the decimal point as the number of pips. If the price changed from 1250 to 1250.70, the shift was 70 points. If it changed from 1250 to 1251 then the move was 100 pips, so basically, $1 equals 100 pips.
The cost of 1 point of gold depends on the size of your transaction. You can use a trading calculator to find out the cost. For example, in FXCL, with a volume of 1 standard lot, a point will cost $1.
Specifics of Trading
Before opening your first trade, carefully study all trading conditions, including spreads, leverage, and swaps. Often, they may differ from other currency pairs.
The same applies to metal trading schedules. For example, in FXCL, trading starts at 1:01 and ends at 23:00 server time, which is an hour less than the standard period.
Gold Trading Activity Levels
Depending on the level of volatility in the Forex market, there are three main periods of the highest gold trading activity:
- The beginning of the Asian session
- The beginning of the London session
- The beginning of the American session
The optimal period to trade gold is from 12:00 GMT to 17:00 GMT. At this time, the fluctuations average 140 points. This means that for maximum profit, it is better to forget about night trading.
The maximum level of volatility during the week falls on Tuesdays and Wednesdays; the minimum level is on Mondays.
The Main XAUUSD Correlation Pairs
If you trade on several instruments, then you should pay attention to the level of correlation. To do this, you can use special programs such as Correlation Matrix. Remember that correlation can be either direct or reverse.
Gold is most correlated with the following pairs:
- XPTUSD - Platinum
- XAGUSD - Silver
- USDCNY - Chinese Yuan
In a previous article, I told you that the movement of gold and yuan quotes are similar since China is in first place in the extraction of this precious metal. Please note that for the most part, these two instruments have opposite directions as the US dollar is located at different places in these two pairs.
You can use the correlation of gold and yuan in your trading. The movement of these instruments matches by 95% and that makes it possible to use the trend of one pair to trade the other.
The coincidence of the movement of gold with silver is 88%. Correlation, in this case, is direct. That is, if silver grows then gold grows as well, and vice versa.
Influence of Major Economic News
Since the XAUUSD pair directly depends on the US dollar, any news affecting this currency will also affect gold. Pay attention to the news with the highest impact:
- Nonfarm Payrolls
- Fed Interest Rates
- Inflation level and GDP
Do not forget about the correlation with the yuan. The sharp jumps in USDCNY will affect XAUUSD, so you should follow the news affecting the quotes of the Chinese currency.
XAUUSD Analysis: What to Look For
Keep an Eye on Central Banks' Gold Purchases.
Gold was the first currency, so it is a secret that central banks own gold to exchange different currencies. Gold also helps diversify their countries' financial risks, so these are two main reasons why they build up gold reserves year after year. When a central bank buys gold, it can be a good signal for opening trade, but there are many other factors, so you should consider all of them to analyze the XAUUSD chart carefully. For example, to support Rouble Russian central bank announced buying gold from commercial banks. Trading during such news releases can benefit knowledgeable market players.
Gold Analysis by Targeting Highs and Lows
Usually, gold is not volatile, so it tends to trade in a range. Buying lows and selling highs can be a low-risk XAU/USD trading strategy suitable for beginners, but remember that it can take some time to hit the ATH or ATL.
Geopolitics and Gold
Gold tends to be a safe-haven asset, even against geopolitical events, and gold prices are often positively correlated with rising tensions. For example, September 11 attack affected the rise of gold prices by 6 percent in a day. Some military conflicts can reduce the risks like it was during Operation Desert Storm in 1991. After the initial spike, the gold price fell because the campaign was successful and political risks decreased.
Analyzing Gold Demand for Commercial Usage and Industries
Gold is mainly used in the jewelry industry. It is also an invaluable material for use in electronics. Gold is crucial for manufacturing units for jet engines, nuclear reactors, spacecraft, and microchips in smartphones and other gadgets. Tracking the demand for gold in commercial markets can be an excellent signal to predict the changes in gold trading prices.
Well, this is all about the main features of gold trading. In the next article, we will discuss gold trading strategies. Stay with us!