How to trade gold and not catch stops
Hello friends forex traders!
In the market, in addition to currency pairs, there is an asset XAUUSD or, more simply, gold. If you ever tried to trade it, then you noticed how sharply your stop loss was knocked out)) Why does gold move so sharply? How can we use this to our advantage? A bit of history, the important nuances of XAUUSD trading that you should know, and ... an interesting strategy, specially selected for this tool - in today's article.
Those who watch the gold are well aware that in the second decade of the 21st century, precious metal has ceased to be a safe haven, protecting investors' assets from inflation at an ever-increasing price. The long-term tendency to increase the value of gold led to four-digit exchange rate values, the widespread use of robots and strategies that turned out to be the grail, in fact, using averaging in the form of “stretching” grids of buy orders or Martingale - increasing the position with increasing loss.
Since 2011, there has been a dramatic change in the “trading mode” of the market in terms of volatility, which was preceded by a global trend reversal and the subsequent wide flat. These movements turned gold into a speculative instrument and nullified previous strategies.
Gold - from the depths of centuries to the present day
Gold as an asset has long been of value to humanity, as evidenced by archaeological excavations during which gold jewelry and coins were found. For 4-5 thousand years BC, of the first seven metals discovered by people, it was gold that received precious status, becoming the basis of the economy and the monetary system.
From ancient times until the XIX century, the value of coins of any state was determined not by face value, but by the content of gold, which in the era of "paper money" also acted as the "gold standard", which was canceled in 1971 in the United States. This was followed by global currency market reform, which led to the emergence of the Forex market after the Jamaican meeting of the G7 leaders.
The consequences of the decision - to evaluate all currencies through the US dollar, adopted by the heads of leading world states in Kingston, can be seen in the picture below. After official ratification by the International Monetary Fund in 1978 of “decoupling” currencies from the “gold standard”, the US Federal Reserve dramatically reduced the share of gold in dollars released into circulation. Since then, the number of unsecured notes printed has only grown.
It can also be seen from the graph that the low share of “gold security” for the issue of national money that existed in 1971 served as the main motive for the American government's refusal to be tied to gold. At that time in Europe there was a huge amount of cash dollars received by states in the course of the “Marshall Plan” in the form of loans for post-war reconstruction, which occurred by the middle of the 20th century.
European countries were ready to return not only loans, but also paper American money, demanding in exchange for real precious metal.
Today, there are calls for reforming the Forex market in the form of a return to the gold standard or transfer of sovereign currency to the blockchain.
Both plans are not feasible in the next few years, so you should look for ways to trade gold these days. Before listing the strategies, we will examine the factors that influence the rate of the precious metal.
The earth's crust is low in precious metal, but gold mining is quite simple and cost-effective due to the peculiarity of the metal to concentrate at certain geographical points and form clusters in the form of nuggets. It is conducted in an open way, in zones of geothermal post-magmatic exit, the main reserves of gold ore are closer to the center of the Earth due to the peculiarities of the origin of this metal.
In the XXI century, China took the first place in gold mining, in 2006 it seized the palm from South Africa, which dropped to sixth place due to depletion of deposits. The second place belongs to Australia, the continent has the largest proven reserves of this precious metal and can become a leader.
Russia closes this three. An interesting fact is that the history of gold mining in our country dates back to the end of the 18th century. The first nuggets were found in the Urals, after the death of Emperor Peter I, who laid the foundation for the development of ore business in this region.
The yuan correlates with gold quotes due to the superiority of China in the volume of its production, and the Central Banks of the world with the largest reserves of this metal influence the exchange rate.
The strategic gold reserve of sovereign states
Despite the abolition of the gold standard, different countries still accumulate gold as a strategic reserve to support and stabilize the state’s economy. The first place in its accumulations belongs to the USA, followed by Germany by a wide margin, and the third and fourth places are shared by France and Italy, Russia closes the top five, which is almost catching up with China.
The Central Bank is responsible for the monetary policy of the state, therefore gold is an instrument for it, when using which the Regulator does not take into account the current rate, fulfilling its own goals and objectives.
Gold fund replenishment transactions are usually made on the OTC market, but they still affect the metal exchange rate and the value of the national currency, which falls on the increase in emissions, due to which the state stock increases. In the event of an economic crisis, these reserves are thrown to international exchanges in order to increase the supply of foreign currency in the country, usually US dollars and euros.
Industrial use of gold
In addition to the actions of the Central Banks, the XAUUSD rate is subject to the influence of industry demand for non-ferrous metals. Gold is used in the consumer sector for the manufacture of jewelry, gilding for premium products, and the manufacture of dental crowns in dentistry. Metal consumption is growing along with the development of microelectronics related to the production of computers and mobile gadgets, as well as the traditional use of gold in the chemical industry.
Traders can often observe an unambiguous, strong correlation of the growth of prices of non-ferrous metals and gold during the economic boom and a drop in the sharp collapse of demand during the crisis.
Global trend of gold
Like any asset, the XAUUSD pair is affected by seasonality, downturns and activity growth throughout the day, responds to macroeconomic statistics, etc. As for the global trend, on the scale of weekly candles over a period of thirty years, it still looks growing, being in a temporary correction.
This is a topic of constant speculation by analysts, with more than ten-fold growth forecasts after 2016, associated with a sharp rise in gold at the time the Fed abandoned the zero-rate policy.
If we evaluate the segment locally from the beginning of 2011, the naked eye can see a change in the range of oscillations. The subsequent movement can be conditionally divided into two approximately equal periods: a fall (until 2014) and a subsequent wide flat. Such a long-term behavior of quotes allows us to deny with sufficient certainty the presence of any directional movement in the XAUUSD pair, which significantly underestimates the role of a “safe haven”.
Many traders no longer see the possibility of earning on gold amid a nine-year growth in the stock markets of developed countries. The same applies to a simple layman who chose digital currency during crisis moments.
According to reports of the Finnish direct international exchange exchange LocalBitcoins, the sharp spikes in cryptocurrency demand coincided with the crisis in Venezuela, Zimbabwe, India (monetary reform), Turkey (U.S. sanctions), and South Korea (launching DPRK missiles). An interesting fact is that, according to the latest October service data, Russia unexpectedly took the first place in Bitcoin purchases.
A three-year flat takes place within a fairly wide range, therefore, abandoning a unidirectional strategy (purchase), you can confidently build speculative medium-term and short-term tactics. As can be seen from the chart of day candles - the gold market shows rather long periods of directional movement, for example, from spring 2018 to the end of summer, a clear downtrend was kept.
Seasonal fluctuations in XAUUSD quotes
Despite the lack of a global trend, XAUUSD quotes are still influenced by seasonality. This factor is shown on the site in the special service “Seasonal Currencies Movements”, which is available from the drop-down menu of the “Tools” tab.
In the presented graph, broken down by the summarized curves of 15-10-5 year fluctuations, one can clearly see the "Christmas rally", originating in late December, lasting all of January. This year quotes “moved away from New Year’s traditions” - growth ended already in February, contrary to statistics, and the spring falling trend dragged on, but the November rebound was seasonally predictable.
January growth is often explained by the reflection of funds trusting part of the assets of gold as a protective instrument, which in principle is justified from the point of view of diversification in the management of large capital.
A similar situation arises in the summer - gold traditionally grows during a period of decline in trading activity in other markets, part of the capital is withdrawn from risky assets and is “parked” in the precious metal. However, this year there was a discrepancy between current and statistical trends.
In the spring, with the seizure of the summer season, the traditional correction comes to the markets after the winter rally growth, which is clearly visible over all periods of time - 5-10-15 years.
Summing up, we can say with confidence that the changes in the fluctuations of gold over the past 9 years did not affect the seasonality factor, which can be used as a filter in medium-term trading.
XAUUSD Specifications and Specifications
In the Forex market in the broker's terminals, two types of gold designations are common - Gold or a more correct name - XAUUSD. This designation complies with ISO 4217, a three-letter code. According to this standard, the letter “X” is added in front of the designation of Au metal, taken from the table of chemical elements of Mendeleev.
The gold exchange rate at the moment is a four-digit number, with two decimal places, reflecting the current value of a troy ounce, expressed in US dollars.
The system of counting points in XAUUSD quotes often causes controversy. In order not to get confused, take the value of the digits after the decimal point as a two-digit number of points, i.e. a change in price from 1270 to 1270.50 should be perceived as +50 points, and growth to 1271 would mean an increase of 100 pp.
The table of deals of any system with the participation of the desired instrument (in this case XAUUSD) on the myfxbook service can help to verify the correct calculation of points for gold or any other non-standard instrument. Having chosen the history of transactions of any monitoring in this Forex account analysis service, the trader can see how points and the financial result of XAUUSD closed positions are actually counted.
The cost of a point, depending on the lot size selected by the trader, can be found in the Trader's Calculator service from your broker, for example, from Alpari. Upon entering the market with an order of 0.1 Lot, the trader will earn or lose $ 0.1 at each point.
Pay attention to the time of gold trading with your broker!
For some brokers, trading ends an hour before midnight. Traders often find out about this on one of the Fridays, holding a deal to close it at the end of the day, avoiding moving the position over the weekend, unexpectedly detecting the absence of quotes movement on the chart.
Before trading any instrument, including a pair of XAUUSD, pay attention to the specification of the contract. This will give information not only about the trading time, but also about the size of the swap, which is added or subtracted when the transaction is transferred overnight, depending on the direction of the position.
Mid-term and short-term trading activity XAUUSD
To determine the days of the week and hours of active trading in the gold market, we turn to the "Forex Volatility Indicator", which is located on our website in the drop-down menu of the "Tools" tab.
During the year, the highest average intra-day volatility occurred in the morning hours of the Asian session, the opening of the London LSE, which traditionally trades in large volumes of metals, and the beginning of the American session. The bars of the intraday volatility histogram clearly show that the most active trading period falls from 15-00 to 20-00 Moscow time. At this point, we will return further.
The revealed trends make night trading strategies unsuitable for gold speculation and “shorten” the time to 20-00 Moscow time.
By setting the switch to 1 day mode, we find out the average value of intraday fluctuations. As you can see from the graph, on average it is equal to the value of 1,300-1,500, which in terms of points, according to the principles described in the section of gold characteristics, is comparable with 130-150 points. This volatility is comparable to many major currency pairs.
The most volatile days are Tuesday and Wednesday, the least activity is observed on Monday.
On a historical scale, volatility peaked in 2011, where there was a global breakdown of a growing trend. This was followed by a peak after the announcement of the program of quantitative easing QE, combined with falling to zero discount rates of central banks of developed countries.
The last jump in this parameter was identified in 2016, coinciding with the first Fed rate increase above zero. The current flat corresponds to the minimum volatility values of 2017-2018, which once again confirms the hypothesis of the absence of a trend in gold put forward in the article.
The correlation table of currency pairs, which is the same as the rest of the services considered before in the Tools section, thanks to the color scheme of cold and warm tones, helps to quickly visually determine the relationship between the gold trend and other Forex tools.
Choosing the necessary basic tool in the window, in our case XAUUSD, applying filters if necessary, it is easy to find the currency pairs that are most similar to the movement of gold by the shade of red and the correlation coefficient. They are divided into columns - time intervals, ranging from an hour to an annual value.
A more detailed selection of the most coinciding trends with gold pairs is presented at the bottom of the table and duplicated graphically, where the currencies are divided by a sample of positive and negative correlation. It indicates a similar or mirror repetition of the movement of gold of the selected pair.
The annual value indicates a high degree of correlation of XAUUSD quotes with platinum (XPTUSD) and silver (XAGUSD), as for currency pairs, the yuan (USDCNH) is in the first place in the correlation coefficient.
The dependence of the Chinese currency on gold is logical - the country comes first in terms of precious metal mining. Visually, it can be seen by combining the charts of the two instruments - they move in a mirror, since the yuan is trading in a “reverse” quote with the dollar in the numerator of the pair.
A coefficient in the table equal to 0.95 indicates a 95% probability of a repeat of gold movements, just in the last segment you can observe a violation of the correlation - the yuan is weakening, the pair is growing along with XAUUSD, although it should show a discrepancy. Readers of the daily reviews know that the fundamental reasons are to blame - China is weakening the currency in order to withstand the increased trade duties imposed by the USA.
This is a temporary situation that provides opportunities for quasi-arbitrage; in more detail, such strategies will be considered in future publications on the site.
The prefix “quasi” is not random, because if you compare the graphs of silver and gold, there will be more discrepancies in movements, which is logical, given the coefficient of 0.88. Since it is positive, the charts repeat the movement of each other and in this case it is possible to split (diversify) a position by entering two instruments.
As for platinum, this metal is rarely traded by brokers, therefore, to compare its quotations with gold, you can use the TraidingView service, assigning XTPUSD the role of an indicator.
The impact of fundamental indicators on the XAUUSD course
Global influence on gold is exerted by interest rates of the US Federal Reserve and the ECB, their GDP and inflation. Since XAUUSD quotes are pegged to the dollar, any economic news marked with three significance points in the calendar of economic events will certainly be reflected.
Separately, it is worth noting the influence of China and, indirectly, any "Asian news", which is why night trading on gold is marked by high average volatility.
The planned release of news and various economic indicators, as well as a preliminary assessment of the possible degree of their influence, you can find out the forecasted and previous values on the service from our website - “Economic Calendar”.
XAUUSD Trading Strategies
One of the features of XAUUSD quotes fluctuations, which can be taken as a basis for creating a strategy, is a quick change of quotes within the range on any timeframe. The reason for this is the low liquidity of gold trading in the Forex market.
The fact is that the spot market is accessible only to professional investors because of the high margin requirements of the exchange. It is precisely on it that the main volumes are tied, while the XAUUSD is openly weak in glass, so almost any major transaction collects pending orders from a large number of levels.
A sharp rise in quotes and the subsequent response can serve as an excellent signal for a counter-trend strategy.. Candles that leave large tails after closing in the direction of a local trend are an occasion to open a trade in the opposite direction.
The signal should be amplified by a false breakout in which the candle's tail breaks through the prevailing flat range. Working timeframe - H1.
The tail of the signal candle will determine the size of the stop loss, and the maximum range of the local trend (usually two or three candles) - the level of take profit.
The impulsive nature of the movement of quotes can be used in breakout strategies, breakdown of the range. Basically, this tactic is designed for professionals who can determine the boundaries of the flat and place higher and lower pending orders. Impulse traders do not just like gold)
In this case, the take level will be determined by the size of the flat range, and the stop will be located beyond one of its borders, opposite the direction of entry.
The best time for trading within the day is the period from 15-00 to 20-00 Moscow time. Once again, it is worth recalling that the concept of "night trading" in the form of flat strategies does not exist for gold.
Classic trending strategies are not available on small timeframes, directional movements in gold are formed on daylight candles. Before using them, it is necessary to take into account the peculiarity of a high range of vibrations, the tails of the candles suggest the use of a large stop.
The same feature affects trading by levels, which represent price zones, in the case of XAUUSD of a rather wider size, unlike currency pairs.
To avoid “extra” knocking out orders in the stop, you can use the ATR “true volatility” indicator to determine its size. This algorithm and other various rules for setting loss limits are described in detail in the topic "What you need to know about Stop Loss."
American Gold Explosion Strategy
The strategy is very simple and, at the same time, effective.
On the hourly timeframe, the “inactive” segment of the session until 15-00 can be used in the form of a filter range, determining the flat price zones that have been formed up to that time and trading the classic breakdown.
Having placed both directions of the order after 14-00, having previously determined the take profit level equal to the size of the flat range, the trader can keep the trade until closing with a profit or exit it after 20-00, using the opposite border as a stop.
The rules of the strategy are extremely simple:
1) Determine the flat area at about 14:00 - 14:30 Moscow time;
2) We place pending orders Sell stop and Buy stop below and above the borders of the flat;
3) Stop loss orders at the level of the opposite order, take profit is equal to the size of the flat range;
4) A candle at 15:00 (sometimes a little earlier, sometimes a little later) activates our order, we wait for TP, or SL.
5) At 20:00, if neither take nor stop loss has worked, close the position, regardless of the presence of profit / loss.
Of course, you can adjust this idea to your trading style. Perhaps later we will consider this strategy in a separate review.
XAUUSD clearly differs from currency pairs in the style of movement due to low liquidity and intervals of intraday activity. Knowing these features allows you to create unique strategies.
One of them - the analogue of the London Explosion, which can be called the American Explosion, works daily from 15-00 to 20-00 without indicators and does not require a choice of the direction of the transaction. Thus, the “minus of the instrument” - the lack of an intraday clear trend turns into a method of almost constant income that does not depend on fundamental factors and indications of technical indicators.
Another reliable method of making profit can be pair trading using correlations or trading on divergence signals, which has proven itself in the renminbi.