Since the beginning of time, gold has had a special place in history. It has been used to build religious idols, settle political differences, honor monarchs, demonstrate affection, serve as currency and, more recently, has been used for commercial processes. Until , the U. It also holds promise for traders - if they can find the trend in this often volatile commodity. However, thanks to an easing of currency restrictions following the last recession, the Fed is facing increasing challenges.
The Fed has taken a much more accommodative stance on rates, which continued through A weak dollar and rocketing commodity prices during this year are the evidence of this: Although we'll never know how high a new peak will be until it's behind us, increasing volatility appears to be the modern gold reality. A Method for Trading Gold As you can see in Figure 1, one strategy is to watch for situations where the relative strength index RSI shows an extreme level that often marks market tops.
It is also common to watch for extreme lows because this often signals a market bottom shown by red circles. In this case, each RSI signal is not acted upon unless it is confirmed by a moving average crossover. Each trade is marked with a letter. In this chart, we are using nine-day purple line and day blue line simple moving averages.
Another powerful trading tool, known as divergence , involves looking for situations when the price of an asset and an indicator move in opposite directions. As you can see from the chart below, the numbers 1 through 3 signal areas with positive divergences in green and negative divergences in red. Another good way of further confirming signal strength is to look for support or breach of trendlines dashed blue lines. The challenge for the short-term trader as well as the buy-and-hold gold bug, is finding tools to help determine when to buy and sell.
Let's look at a few other technical and fundamental ideas to help prevent you from getting overwhelmed by the emotions that accompany this highly volatile precious metal. Technical Tips One of the simplest technical tools is also among the most useful, and that is the trendline. Trendlines are also a great way to confirm other trading signals such as those generated by the relative strength index or a moving average crossover. Whenever possible, it is best to wait until the trendline has been breached before executing a trade.
As you will see from the charts below, rising trendlines are created by simply connecting a series of rising bottoms to gauge where the stock will potentially find levels of support. On the other hand, downward sloping trendlines are created by connecting a series of lower highs. This simple tool is an optimal method for traders to use for determining an asset's direction. Moving averages have become a popular trading tool because they are simple to use and easy to generate in most charting programs.
The idea is to buy when the shorter term, faster moving average crosses above the slower one and to sell when the faster average crosses below the slower average. This works great in a trending market but not so well in range-bound markets. The trick is in knowing what type of market you're in. Because markets trend about one-third of the time on average, relying on moving averages as your primary tool can become quite costly.
This is where trendlines can help. RSI is an oscillator that measures price momentum. It is also very useful in showing divergences with price. As Figure 1 shows, the RSI often hits extreme highs and lows at gold's price turning points.
Looking at the concept of divergence in Figure 1 above , note the differences between the RSI and price. As the first green lines on both shows, the second low in the RSI was higher than the first low, while the second price low was lower than the first. This warns the trader that buying power is building. Sure enough, a rally followed. Red lines at Point 2 show an example of negative divergence. Fundamental and Intermarket Considerations Intermarket relationships can be helpful in trading gold.
As such, it's important to watch the euro and the U. It is important to note that gold prices have rallied nearly every time the dollar has dropped see Figure 3. When gold rallies, oil usually rallies along with it. A strong economy engenders confidence in domestic markets, increasing their attractiveness to foreigners who need to purchase U. That is good for the strength of the dollar.
Rising interest rates have a similar impact. The higher the interest rate earned by a Treasury or corporate bond, the more investors these instruments will attract and the better it is for the dollar.
Putting it all Together Let's walk through the trades shown in Figure 1, putting our analysis together following the peak. First, we get an extreme peak in the RSI, after which it turns down and then crosses the 70 RSI threshold the first red dashed line. The long-term trendline was not broken, but given the parabolic rise in gold leading up to its peak, it is always a good idea to draw short-term trendlines.
This short-term trendline on Figure 1 was broken around the same time as the RSI sell signal occurred. When you compare Figures 2 and 3, the U. Next, the RSI dropped to an extreme low before recovering, warning of a possible trend change. This was confirmed by a moving average crossover buy signal Figure 1, Point B. A short-term trendline was also broken not shown. Looking at Figures 2 and 3, the dollar had hit a peak and was dropping again - a good sign for stronger gold prices.
Finding Confirmation Divergence between the RSI and price provides useful trade confirmation as well. By waiting for confirmation in each trade, confidence is increased; the more confirmation from non-related tools, the better.
Confirmation should come from indicators that have a low correlation with each other, which is why using technical and fundamental inputs to confirm price direction are so valuable; they use completely different data sets.
The Bottom Line Gold charts, whether short-term or decade-long, tend to include a lot of noise. Because the hardest part of any trade is developing a plan and sticking with it, combining technicals and fundamentals will help prevent you from being shaken out of your trade by the volatility.
As long as gold fundamentals are intact and intermarket relationships are strong, stay the course. Here is the beauty in this approach: As you get better at the gold trading game, you will develop a feel for the process so that you'll be ready to execute when the time comes. Dictionary Term Of The Day. Passive investing is an investment strategy that limits buying and selling actions. Broker Reviews Find the best broker for your trading or investing needs See Reviews.
Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. A celebration of the most influential advisors and their contributions to critical conversations on finance. Become a day trader. In this chart, we are using nine-day purple line and day blue line simple moving averages SEE: Moving Averages Another powerful trading tool, known as divergence , involves looking for situations when the price of an asset and an indicator move in opposite directions.
Figure 1 The challenge for the short-term trader as well as the buy-and-hold gold bug, is finding tools to help determine when to buy and sell. Long-term chart of gold, showing a three-year uptrend followed by choppy trends after the top. Daily chart of the U. Dollar Index that shows it moving in the opposite direction of gold as seen in Figure 2.
What Is Wrong With Gold? Passive investors will purchase investments How much a fixed asset is worth at the end of its lease, or at the end of its useful life. If you lease a car for three years, A target hash is a number that a hashed block header must be less than or equal to in order for a new block to be awarded. Payout ratio is the proportion of earnings paid out as dividends to shareholders, typically expressed as a percentage.
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