Trendlines is one of the simplest tools for gold trading and should be one of your gold trading strategies. Furthermore, is also among the most useful ones. They are an excellent way to confirm other signals of trading such as those generated by a moving average crossover or the relative strength index. It is always good to wait till the trendline is breached whenever possible before executing a trade.
Moving averages have quickly become a very popular trading tool because they are really simple to use and very easy to generate in most programs that are used for charting. The real idea is to buy whenever the shorter term, fast moving average crosses over the slower one. And when it comes to selling, it is best to sell when the faster average goes below the slower one. While this rule works great in trending markets it does not do very well in range-bound markets. The trick, however is to understand the kind of market you are in. Because most markets trend on average roughly about one-third of the time, relying on moving averages as a primary tool can prove to be quite costly. Trendlines help a lot in such situations.
RSI or Relative Strength Index is an oscillator that can be used to measure the price momentum. It can also be used to show divergences with price. The easiest buy signals are generated when the Relative Strength Index crosses the oversold line, similarly the easiest sell signals are generated when the Relative Strength Index crosses the overbought line.
Considering Inter-market Relationship
Understanding Inter-market relationship can be very useful while trading gold. Inter-market analysis is made on the basis of known relationships between different markets to develop healthy trading rules. This approach has proven to be very useful for a number of markets, including gold, crude oil, S&P 500, Eurodollars, Treasuries, and many more.
It is important to watch the US dollar and euro index along with crude oil prices to get clues on the trending action of gold. They are very important external markets for gold. Gold prices have rallied almost every time there has been a drop in the dollar. Also, whenever the value of gold goes up, the value of oil also goes up.
Interest rates and Economic strength are two of the other important Intermarket considerations. Strong economy always boosts the confidence of domestic markets, which increases its attractiveness to foreigners who have to buy U.S. dollars to buy American assets or stocks. This is excellent for the strength of the dollar. Similar impact can be seen from rising interest rates. The higher the interest rate earned by a corporate bond or a Treasury, the more these instruments will attract investors and the better it is for the health of the dollar.
While there are always other techniques you can use to make market predictions, Intermarket analysis is one of the few techniques that offer a very strong basis for predicting the market, based on a very solid fundamental reasoning. Most traders start looking for markets whose prices move in tandem or correlated markets when they get started with Intermarket analysis. While correlation is important, it is not as critical as many tend to think. Even during times when a perfectly correlated market leads another, the analysis can still be misleading.
Divergence between the price and RSI offers very useful trade confirmations. Waiting for confirmation in each trade increases confidence, also it is always better to get confirmation from nonrelated tools. Confirmation from indicators that have lower correlation with each other is most effective, which is why using fundamental and technical inputs to confirm the direction of price is so important; they use totally different sets of data.
The Bottom Line
Generally Gold charts include a lot of noise, whether it’s a decade-long chart or a short-term chart. Because the most difficult part of any trade is generating a plan and sticking with it. By using the combination of technicals and fundamentals you can prevent from being knocked out of your trade due to the volatility.
As long as gold fundamentals stay intact and the inter-market relationship is strong, stay in the trade. The beauty of this approach is that even if these factors significantly change, it will often come with a technical sell signal like the trend line break. You’ll understand the process better as you get better at your gold trading game, which will help you execute at when the right time comes.