Using Price Action trends to trade gold is one of the simplest forms of technical analysis that you can use as a trader. While you might not be sharp at math or computer programming to find your own unique way of where gold prices are going in the future, you can always observe how the gold price changes as a result of crowd behaviour. Simple as it may be, price action trading has proven to be effective at some notable degree. It all depends on who is using it and how it is being used.
Price action is generally defined as trading with a clear chart and relying solely on how price is moving instead of using technical indicators or Expert Advisors. The advantage of using a clear price chart is that you get the raw information and avoid any clutter and confusion from overly complex fundamentals when making an entry or exit trading decision.
What Affects Gold Prices?
What moves your specific market, in this case gold, is important data for any trader or investor. After all, macroeconomics does dictate the movement of commodities like gold and currencies like the US dollar.
In general, gold has the tendency to increase in value during tough times when investors are looking for low-risk assets, such as world wars and political instability. Risk appetite during such circumstances tend to be significantly lower than when economies are booming. Supply and demand can also trigger sharp moves in either direction. A depleting supply of gold in China, for example, can increase price due to a projection of shortage in supply with sustained demand.
How to Use it Profitably?
Gold trading from a purely price-derived perspective takes considerable charting time. One must know the chart patterns with the highest probability and filter out the choppy ones. Trends are the easiest price pattern to identify and participate in.
For gold trading, identify the current trend, which is either going up or down, or referred to as being bullish or bearish. The best time frames to identify current trend is on the 4-hour, daily, or weekly charts. There are platforms offering monthly charts, but it is too far back for a regular investor unless he/she plans on sitting on the investment for years to come.
Once the direction is identified, start looking for higher highs/higher lows or lower highs/lower lows. A higher high is created when price breaks the previous high before going back down and a higher low is created when the previous low is broken before price goes back up. There should be at least 3 instances of these peak or bottom breaks before it can be considered a viable trend.
Try to incorporate candlestick patterns when trading with raw prices. Candlestick charting is another old technique used to gauge price direction and overall market condition. Upon further learning about candlestick patterns, you will encounter terms like doji, engulfing, dark cloud, and pinbar. Memorize the patterns and see where they fit in your chart. Use them in context and don’t just foolishly trade whenever you see it pop out.
Patience is an important attribute for success in gold trading as well as in any financial market. Entering at the right time can play a huge part in your account’s bottomline over the long run. So, where should you enter once you’ve identified a trend in the gold market?
One way to establish position in the gold market is to leave an entry order at the price you think it is going to start reversing back to the original trend. Look for a price level in the near future where the short-term counter trend starts to weaken and revert back to the bigger picture. Positioning yourself around these areas give you minimum risk in case you are wrong but also open a larger profit margin when price does continue to its original course.
Tips When Using Price Action
While price movements can direct you to profitable gold positions, it is not the complete package. One must work around solid work ethics and discipline plus certain trading parameters that guide them in entering and closing trades. For instance, try to find the right time of the day or week in which to place trades. Some gold traders find their sweet spot during the US/London exchange overlap while others much later in the day.
Risk management is equally important when trading using price charts or any methodology for that matter. Risk is inherent in all financial markets and not just gold. Without proper capital management, your account could blow up in a matter of months. The general rule of thumb is to maintain a 2:1 reward to risk ratio. This allows you to still profit even if half of your bets are wrong. Lower reward to risk ratios will require you to win more often than you lose.
When looking at price, avoid shorter time frames like the 5-minute and 15-minute charts. They are more volatile and can be near impossible to predict which direction it goes. You will often be tricked into going into one direction when it actually is preparing to reverse sharply in the other direction hence stopping you out more frequently.
The Psychological Challenges of Gold Trading
Success in the trading arena is predominantly attributed to mindset and psychology. Without the right mindset, one cannot make this a steady source of income. Sure, he/she will win a few times, but lose it all in the long term. Aside from the gross profit/loss, you also pay a spread to your broker every time you make a trade. This chips away any profits or aggravates any losses.
Be patient in taking trades, especially if you are going after trends. Most of the time, price moves in ranges. Have the patience to wait for it to make new highs or lows before riding the trend. An entry order is ideal so that you won’t have to glue your head in front of the screen 24/5 just to get a trade.
Let profits run and cut losses quick. Another adage in the trading industry, this advice can save you the most money over time. Break the habit of having to be right all the time about your predictions. Set a stop loss for every position you take and get out as soon as that stop loss is hit. While there are stop loss orders that are automatically executed, try and establish mental stop loss orders since this gives you more flexibility. Following this advice while trading trends in the gold market can steadily grow your account.
Bottomline, trading trends using the price of gold leaves loopholes in your game plan. Fill these gaps by incorporating other tools like candlesticks, proper risk management, and fundamental changes. It may take some time to find your footing and start making money, but the stressful learning curve can indeed bring a passive source of income.
How to Trade Gold?
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