6 Tips for Trading Gold (XAU/USD)

For many years, gold has served as a reliable store of value and one of the earliest currencies. It has limited practical use, but traders recognise it as a form of wealth like fiat currency is. It is commonly known as yellow metal as well to many others and is a popular investment option in the financial markets. Many traders use it that way because it is a tangible asset that exists in the world, rather than just numbers on a computer. 

Gold is also relatively resistant to central banks or monetary policy, which speaks to its inherent value.

Key Points

• Central banks’ gold purchases can indicate changes in gold prices and provide trading volatility in the XAU/USD pair.
• Political and economic uncertainties often lead investors to consider gold as a safe haven, affecting its relationship with major currencies and presenting trading opportunities in the XAU/USD market.
• Trading gold during peak liquidity hours, utilising the symmetrical triangle chart pattern for breakouts, and monitoring gold’s industrial and commercial demand can strategically inform buy and sell decisions in the XAU/USD pair.

Why Trade Gold

The gold market has expanded in recent years, providing opportunities for individuals who previously may not have considered trading gold. Previously, you’d have to purchase physical gold bullion, coins, or other forms of the precious metal to own it. Even though you can still do that now, there are many other ways to trade gold online. 

You can trade gold in various ways, including futures markets, spot and options, and exchange-traded funds (ETFs). You can also trade gold against the dollar and several other major currencies. And just like the forex market, gold and other precious metals have a lot of liquidity, making gold a popular safe haven asset.

Learn all about the 10 gold ETFs and how to invest in them with our Academy article. 

Gold has a greater daily trading volume than most currency pairs, except for majors like EURUSD, USDJPY, and GBPUSD. Because of its massive daily trading volume, the fees and charges for trading gold in the markets are relatively low. 

How to Invest in Gold

If you’re just getting started in the markets, here are several ways you can participate in trading gold:

• Gold Spot US Dollar or XAU/USD
• Gold Contract for Differences (CFDs)
• Gold ETFs
• Gold mining stocks
• Gold futures ^[1]

Although this list isn’t exhaustive, these are the most common ways to trade gold in the securities markets.

Sign up for a Vantage live account and get started on your gold investment journey today.

What is XAUUSD?

XAU/USD is the trading symbol for gold against the US dollar. It represents how much USD is needed to purchase one ounce of gold. Trading XAUUSD pair is popular among gold traders who seek opportunities in the fluctuations of gold prices relative to the dollar. 
This trading pair is influenced by factors such as supply and demand, economic data, geopolitical events, and central bank policies. Understanding these influences helps traders make informed decisions when buying or selling XAU/USD.

6 Tips for Trading Gold XAU/USD CFD

With the diversification of gold markets, there are now many ways to trade gold online, including futures markets, spot and options, exchange-traded funds (ETFs), and more. If you’re starting out with the XAU/USD pair, here are some tips to keep in mind.

1. Pay Attention to Gold Purchases Made by Central Banks

   1. All central banks own gold because of its direct relationship with banknotes and coins. Also, most central banks store gold to diversify the financial risk of their countries. The reason they do this is to benefit from the stability both gold and foreign currency reserves give while together, rather than apart. 
   2. So, when central banks anticipate currency instability, they often purchase gold to hedge that risk – a fundamental indicator. For this reason, look out for when central banks start buying massive quantities of gold as it may suggest potential changes in gold price.  
   3. A good example is the announcement by the Russian central bank in 2022 to buy gold from commercial banks at a fixed price to support the Russian Rouble ^[2]. 
   4. Such a move signals two things:  
   5. First, a government is acting on the assumption that major currency values will fall. For this reason, traders shift significant amounts of their investments to less volatile funds. 
   6. Second, such moves usually lead to an increase in gold prices — at least in the short term. 
   7. Making trades during such announcements allows you to take advantage of the resulting volatility in the XAU/USD pair. 

2. Observe the Effects of Geopolitics on Currencies

   1. Political and economic instability around the world usually causes volatility in currency prices. During such events, gold provides a safe haven for many other liquid assets. 
   2. If you open an XAU/USD position, you can potentially protect your assets from unforeseen conditions that can impact other currency markets. Gold has a strong relationship with the US dollar and other stable currencies like the Euro, the Japanese Yuan, and the GBP. 
   3. The Russian invasion of Ukraine is an excellent example. It caused the price of the dollar to skyrocket, while the Russian Rouble lost ground^[3]. Another example which happened in March 2023 highlights a global banking crisis caused by low interest rates, slowing economic growth, and risky lending practices ^[4]. Taking an XAU/USD position in this case, could have allowed you to take advantage of opportunities in the market.

3. Target Previous Highs and Lows

   1. The XAU/USD pair tends to follow trends and trade within a specific range. That provides you with an excellent opportunity to take advantage of buy and sell signals within the previous lows and highs.   
   2. When gold is trending upwards, target a historical previous price as your sell price, and when it trends downwards a previous low. Most times, it can return to its previous highs or lows.  
   3. Although targeting previous lows and highs is low risk, it isn’t ideal for day trading. It may take time for gold to hit old highs or old lows, and that takes away any opportunity for a quick upside.  

4. Trade During New York Hours

   1. Although gold trades happen around the clock, you’ll find most of the market liquidity during New York trading hours. The market’s liquidity and your trading goals will determine your strategy.^[5]
   2. You can trade during peak hours where there’s plenty of liquidity and low volatility. However, if you’re scalping, trading after-hours will provide you with the necessary volatility to potentially make positive gains from your strategy. But, always remember that volatility comes with an added risk of losses to any XAU/USD position you take.  

5. Analyse with the Symmetrical Triangle

   1. The symmetrical triangle is a straightforward chart pattern that shows a period of consolidation before a price breakout. When two trend lines with identical slopes but different directions converge, you have a symmetrical triangle.^[6]
   2. This pattern indicates a period of indecision in the market as buyers and sellers struggle for control. Traders can use this pattern to identify potential breakouts and make informed trading decisions based on the current market price movements between the XAU/USD pair.  
   3. By monitoring the trend lines and waiting for a breakout, traders can take advantage of potential opportunities and benefit from any price movements that occur.
   4. When these two trendlines converge, price movements between the XAU/USD pair grows tighter, and open up a window of opportunity for you to take advantage of a breakout.
   5. Most times, you’ll use the symmetrical triangle pattern with other technical indicators like the Relative Strength Index (RSI).
   6. When other indicators point to a possible price breakout, the symmetrical triangle can provide you with supporting confirmation and boosts your confidence in taking an XAU/USD position.
   7. Once the two trend lines converge, put a stop-loss order slightly below the descending trend line. 

6. Follow Gold Demand for Industrial and Commercial Uses

   1. A good example for gold demand comes from the jewellery industry. By tracking the demand for gold in consumer markets, we can gauge the fluctuations in the global gold trading price. When tthe global demand for gold jewellery increases, the price of gold in the markets increases correspondingly and vice versa.  
   2. Other uses of gold can also affect the price of gold in the financial markets. For example, gold is a key component of smartphones and other electronics because of its efficient electricity conduction. An increase in demand for electronics increases the demand for gold, and that increases the price of the metal.  

Gold Trading Strategies

Here are some gold trading strategies for traders:

1. Trend Following Strategy

One popular strategy for trading gold is the trend following strategy. This approach involves identifying and trading in the direction of the prevailing market trend. Traders use various tools, such as moving averages and trend lines, to determine the trend’s direction.

By entering trades that align with the trend, traders can increase their chances of returns from sustained price movements. For instance, if gold prices are on an upward trend, traders might look for buying opportunities when the price pulls back to a support level.

2. Breakout Strategy

Another effective strategy is the breakout strategy. This involves identifying key levels of support and resistance and placing trades when the price breaks through these levels. Breakouts can signal the beginning of a new trend or a continuation of the existing trend.

Traders often use technical analysis and chart patterns like triangles, rectangles, and channels to spot potential breakout points. They can manage their risk by placing stop-loss orders just below the breakout level. This strategy can potentially mitigate risk while allowing traders to capitalise on price movements.

3. News Trading Strategy

The news trading strategy involves making trading decisions based on economic news and events. Major news releases, such as central bank announcements, employment data, and geopolitical events, can significantly impact gold prices.

Traders using this strategy keep a close watch on economic calendars and news feeds to anticipate market movements. For example, if a central bank hints at changes in interest rates, gold prices might react strongly.

4. Position Trading Strategy

The position trading strategy focuses on long-term trends and holding positions for an extended period, often weeks or months. This strategy is less concerned with short-term market fluctuations and more focused on the overall direction of the market.

Traders using this approach analyse fundamental factors, such as economic indicators, geopolitical stability, and monetary policies, to make informed decisions. By holding positions over the long term, position traders aim to profit from significant price movements in the XAU/USD pair while avoiding the noise of daily market volatility.

Final Thoughts

There’s plenty to watch out for when trading the XAU/USD CFD pair. Always look out for events that can change the behaviour of central banks and political situations that affect the price of gold. You can also tap on other tips to use your capital, or take advantage of market opportunities in other asset classes. 

Ready to start trading? Take the first step with Vantage! Open a demo account and practice trading with virtual credits, or open a live account in less than 5 minutes to start trading.

Past performance is not an indication of future results.

References