Following Gold in Currency Trading
Gold has always been considered as the ultimate global currency. Before 1973, US Dollar used to be pegged to gold. But with the collapse of the Bretton Woods System that year, US Dollar was unpegged from gold and become a freely floating currency. Free floating means the value of the currency is determined by the economic fundamentals of supply and demand.
Now US Dollar is only backed by the full faith and credit of the US Government. In times of financial crisis like the present when the global economy is in recession, many investors try to take refuge in gold as the ultimate safe haven.
The Australian Dollar (AUD) is known for its strong correlation with gold prices among the different currencies in the world. This correlation is due to fact that Australia has gold deposits and exports gold. On the other hand, USD has an inverse relationship with gold prices. Gold prices rise, USD falls in value. This causes the currency pair AUD/USD to appreciate in value when gold prices rise.
The opposite of this is also true. When USD gains value, gold usually loses value. The pair AUD/USD depreciates as a result. So when gold prices are rising, we can trade AUD/USD currency pair long. Likewise, when gold falls in value, we can trade AUD/USD short. This relationship may be due to the fact that gold is considered to be the ultimate safe haven of their wealth by investors in times of financial crisis. This relationship provides us with a method that we can use to take advantage of the fundamental factors that influence the currency markets.
We now know that AUD/USD pair reacts strongly to gold prices. How do you follow gold in currency trading? We will trade AUD/USD following gold. You should use RSI (Relative Strength Index) as the technical indicator to trigger the trade. If you have read the previous article on how to follow oil in currency trading, I had talked about using the CCI (Commodity Channel Index) to trade USD/CAD pair.
Why is that we are now using RSI instead of CCI when both gold and oil are commodities. It all comes down to how quickly the two indicators react to volatility. CCI gives a quicker signal which is good for relatively less volatile pairs. On the other hand, RSI gives slower signals. This is ideal for more volatile pairs like AUD/USD.
Use a moving average to confirm if gold is in an uptrend or a downtrend. Use the seven periods RSI on AUD/USD chart! Watch when it enters one of its reversal zones, then move back out of the reversal zone in the same direction as the gold is trending.
Enter a long trade on AUD/USD if the gold prices are rising and the RSI is crossing back above the 30 line. On the other hand, enter a short trade on AUD/USD pair if the gold prices are declining and the RSI is crossing below the 70 line.
Set a limit order of 200 pips and a stop loss order of 50 pips for the trade. This gives a risk to reward ratio of 50/200=1/4. This risk to reward ratio is good. The chances are you are going to make 200 pips that means $2000 profit if the trade goes as you had anticipated. And if the trade does not go in your favor, 50 pips stop loss means a $500 loss. It is not uncommon to have a trade go against you only to find yourself right back in trade that goes your way after sometime. - 23229
Now US Dollar is only backed by the full faith and credit of the US Government. In times of financial crisis like the present when the global economy is in recession, many investors try to take refuge in gold as the ultimate safe haven.
The Australian Dollar (AUD) is known for its strong correlation with gold prices among the different currencies in the world. This correlation is due to fact that Australia has gold deposits and exports gold. On the other hand, USD has an inverse relationship with gold prices. Gold prices rise, USD falls in value. This causes the currency pair AUD/USD to appreciate in value when gold prices rise.
The opposite of this is also true. When USD gains value, gold usually loses value. The pair AUD/USD depreciates as a result. So when gold prices are rising, we can trade AUD/USD currency pair long. Likewise, when gold falls in value, we can trade AUD/USD short. This relationship may be due to the fact that gold is considered to be the ultimate safe haven of their wealth by investors in times of financial crisis. This relationship provides us with a method that we can use to take advantage of the fundamental factors that influence the currency markets.
We now know that AUD/USD pair reacts strongly to gold prices. How do you follow gold in currency trading? We will trade AUD/USD following gold. You should use RSI (Relative Strength Index) as the technical indicator to trigger the trade. If you have read the previous article on how to follow oil in currency trading, I had talked about using the CCI (Commodity Channel Index) to trade USD/CAD pair.
Why is that we are now using RSI instead of CCI when both gold and oil are commodities. It all comes down to how quickly the two indicators react to volatility. CCI gives a quicker signal which is good for relatively less volatile pairs. On the other hand, RSI gives slower signals. This is ideal for more volatile pairs like AUD/USD.
Use a moving average to confirm if gold is in an uptrend or a downtrend. Use the seven periods RSI on AUD/USD chart! Watch when it enters one of its reversal zones, then move back out of the reversal zone in the same direction as the gold is trending.
Enter a long trade on AUD/USD if the gold prices are rising and the RSI is crossing back above the 30 line. On the other hand, enter a short trade on AUD/USD pair if the gold prices are declining and the RSI is crossing below the 70 line.
Set a limit order of 200 pips and a stop loss order of 50 pips for the trade. This gives a risk to reward ratio of 50/200=1/4. This risk to reward ratio is good. The chances are you are going to make 200 pips that means $2000 profit if the trade goes as you had anticipated. And if the trade does not go in your favor, 50 pips stop loss means a $500 loss. It is not uncommon to have a trade go against you only to find yourself right back in trade that goes your way after sometime. - 23229
About the Author:
Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading and swing trading stocks and currencies. Discover A Revolutionary New Forex Robot. Develop your own Forex Trading System.
posted by X - Men @ 2:05 AM
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