Gold is a very profitable investment if you understand the tricks of trading in the gold market. While some people choose to buy the yellow bar and store it as an investment in the banks, others decide to trade it and profit from its unique standing in the global commercial market. The gold market is a big one, and it provides high liquidity and ample opportunities to profit out of it in almost every commercial market globally. While traders have continuously been seeking stable investments, gold has withstood the test of time and has proven to be an excellent channel to hedge against other volatile assets.
The unique position of gold at the global commercial markets enables it to withstand market instability, inflation, and many other political factors that affect other currencies. Gold trading allows you to speculate through the futures, equity, and options markets to get competitive leverage in inflationary seasons, for instance, during the covid 19 pandemic. Gold offers a perfect way to safeguard against inflation markets since of provides incredible leverage with measured risks.
During the covid 19 pandemic, the global economy has been shaken with uncertainties about when the situation will get better. Since gold is a stable investment, savvy forex traders have converted more of their currency to gold. If you are a gold trader or interested in becoming a savvy one at it, below are some strategies you can use to capitalize on its potential profit opportunities.
Understand what drives the price of gold
To be a profitable gold trader, you must understand what drives gold prices and differentiate the different driving factors. The price of gold can be subjected to other factors, including inflation, supply and demand, and fear in the market. Gold is one of the oldest investment currencies in the financial market, and due to that, everyone seems to have an idea about it. However, very few know how to interpret their price catalyst in the market.
For instance, when a fire sale hits the financial markets and gold gains a strong rally, many traders interpret that as a fear driving the sale and will enter the market, believing that the crowd will raise the price higher. However, it may have been inflation triggering the stock’s decline, which in turn attracts a more technical group that aggressively sells against the gold rally. As a result, many traders could face significant market risks. These markets always play out in combination with the world financial markets establishing tracks of uptrends and downtrends. Therefore as a gold trader, you have to learn how to interpret price catalysts to avoid reacting to one while another controls the price action.
Aim at previous uptrends or downtrends
The only way you can simplify your analysis is by aiming to buy and sell opportunities at previous uptrends and downtrends for the trading pair. Many savvy traders target such trading opportunities. For instance, you can decide to open a position on gold during an uptrend and aim at a previous high as your sell price or the other way round.
Such a strategy works because gold is a stable asset and is likely to attain these previous highs or lows with time. However, it can take some time before reaching these targets, but it is a low-risk strategy in trading gold.
Take time to understand the crowd.
The gold market attracts enormous crowds, and all of them have their interests in the gold market. There are gold bugs that obtain physical gold bars allocating them to gold futures, equities, and options. They are mostly long term traders who are not discouraged by downtrends. The good thing is that they add significant liquidity since they provide a continuous supply of interests at lower prices. Additionally, they serve a contrary role of offering efficient entry for short sellers in emotional markets.
Moreover, institutional investors in the gold market buy and sell together with currencies and bonds, resulting in bilateral strategies called risk-on and risk-off. These are common in conflicted markets where public participation is usually on the low.
Have in mind the geopolitical factors influencing currencies
In cases where the economic and political factors shake the forex markets, gold is a safe way to safeguard your investment when compared to other currencies. Gold is mostly related to other stable currencies such as the US dollar, which provides you with an opportunity to protect your investment from unseen factors influencing forex markets.
Use the gold chart for analysis.
The gold chart indicates the long-term trend of gold prices that goes back to decades ago. It shows the gold highs and lows carving out movements that have persisted for several years and long periods. When you analyze, these price trends indicate crucial price levels that gold traders need to watch if gold retests them.
Most gold traders use the symmetrical triangle pattern that shows a consolidation period, resulting in a price breakout. It features the convergence of two trend lines going towards the same slope but from opposite directions. So, as consolidation happens, price progression on the pairing tightens, creating a potential trading opportunity on a breakout.
Consider the commercial demand for gold.
Gold is in a fixed supply globally, and it is useful in many industries to manufacture different products and solutions. Consumer demand also affects the price of gold. Companies and tech solutions that use gold may increase their demand for gold following its use in consumer products. Since gold is a luxurious material and expensive investment, its demand significantly influences the market prices. As a gold trader, you should consider its global demand in foreign markets.
Keep your eye on central bank purchases.
Gold is used as a hedge when banks are anticipating the price volatility of specific currencies. When the central bank starts purchasing massive amounts of gold, it indicates different things and should be a sign to any forex trader. Firstly, it may mean that the government believes that major currencies may take a dip. That encourages traders to convert their investments to less volatile currencies. Secondly, when the central bank purchases more gold, its prices go up, which is an opportunity for traders to profit.
To be a savvy gold trader, you have to learn about gold trading as much as you can. This guide is to educate you more about the gold market psychology.