7. Gold trading strategies: pivot points
Pivot points help isolate the price at which sentiment in market is likely to change. Calculating the pivot point is done by simply averaging out the high, low and closing price of any given security. Although gold is constantly traded many will still coincide closing prices with when their preferred stock market closes. This pivot point is then used the following day to signal what mood the market is in. If the price of gold is rising above the calculated pivot point from the previous day then it suggests a bullish attitude, and higher prices in play while there is a drop below the pivot point implies the opposite.
Pivot points are often used as part of wider analysis of where the support and resistance levels are. If the calculated pivot point is lower than the spot price of gold then it is deemed supportive for gold prices while one below the spot price acts as the level of resistance.
Read more about support and resistance
There are numerous tools used to help calculate pivot points in the market, including:
- Fibonacci retracement: this tool helps identify when to enter and exit trades using the ‘golden ratio’, which help find areas of support and resistance in the gold price. This is calculated by six levels that will result in significant price moves: the highest point (100%), lowest point (0%), the midpoint (50%) and then three levels lying between them at 61.8%, 38.2% and 23.6%. These should be the points where support or resistance increases.
- Elliot wave: this tool centres on the theory that every action is followed by a reaction, and that every impulsive move in the market is countered by a corrective one. The idea is that the psychology of traders and the tendency to follow wider trends results in trading that produces waves on the gold chart and that, after five waves, a larger impulsive wave appears before a three-wave corrective phase. The first five waves form the impulsive wave, moving in the direction of the main trend. The subsequent three waves provide the corrective waves. The use of corrective waves can involve the cross-study of Fibonacci retracements.
Read more about pivot point trading strategies
8. Gold trading strategies: other technical indicators
There are other technical tools that can be used by gold investors to calculate other factors in order to help predict where the future price is headed. Some measure the momentum behind any trends that have emerged, others evaluate the level of volatility in the market.
Below are some of the notable technical indicators used to trade gold:
- Relative strength index (RSI): this index is an indicator of momentum that compares the average gain made when prices have risen over a set period of time, for 14 days as an example, compared to the average losses made in the same period. This provides an idea of whether gold is set to become overvalued or undervalued in the near future.
- Stochastics: the stochastic oscillator also helps gauge the momentum behind the price. The theory behind stochastics is that prices that have been trading in an uptrend throughout the day usually settle at the upper end of that day’s price range, and those experiencing a downtrend will close the day at the lower end of the range. Operating within a range of 0-100, a reading below 20 signals an oversold market while one above 80 shows signs of a market that is overbought. This is often used in conjunction with the RSI.
- Average true range (ATR): ATR measures the volatility of a trend but does not identify trends itself. ATR is a type of moving average that compares the highs and lows of gold over a set period of time with the most recent closing price, producing the ‘true range’ for the five most recent trading days, which is then averaged out to produce the ATR.
- Bollinger bands: this is a helpful analysis to identify when sentiment and prices will change direction within a range-bound market. This identifies three important levels that put the current price into perspective: the trendline (where it is heading now), the upper line (where resistance will be met), and the lower line (where support will kick in). These three levels provide a range in which to trade in to help signal where the turning points are.
All of these indicators are used in other markets such as forex. You can read more about using these indicators in the forex market here.
9. Investing in gold ETFs and gold producers
In addition to taking positions on the price of gold itself investors also have the option of looking into gold ETFs and mining companies, either as alternative securities or to help form a broader picture of the gold market through both fundamental and technical analysis as mentioned earlier.
The ETFs in this case are funds that hold interests in one principal asset: gold, usually through derivative contracts that are backed by the metal. This means that the value (and therefore the share price) of gold ETFs is directly influenced by movements in the gold price, giving investors a way to trade gold but in the same way they do a stock rather than a commodity.
The share price of stocks that mine gold is also directly correlated with movements in the gold price, but the strength of the correlation is nowhere near as tight as it is between the metal and gold ETFs. This is because there are many other reasons investors can drive the price of a gold mining stock up or down, regardless of where the spot price of gold has moved. Gold prices could be heading higher and the share prices of the rest of the major mining stocks could be following suit, but if that surge upward coincides with one gold miner releasing poor results or announcing operational issues then it is often the case that the miner will not benefit from higher gold prices like the rest of the market, because of the overriding problems. Quite simply: more drives gold miners than just the gold price, making it a more complex and potentially risky way of gaining exposure.
However, this is not to say that gold mining stocks do not have a role to play. Movements in gold prices are still the main reason for the share price of a gold mining company to fluctuate on a day-to-day basis, and it is often the case that these mining stocks will move before the actual gold price does. If miners are falling in early trade then it could be a sign that the price of gold will follow suit soon after. This makes companies like Fresnillo and Randgold in the UK helpful stocks to follow, regardless of what gold trading strategy is adopted. Equally, gold-linked indices follow a similar pattern, such as the FTSE Gold Mines Index Series which tracks all gold mining companies that have a sustainable and attributable gold production of at least 300,000 ounces a year and derive 51% or more of their revenue from mined gold.
Find out more about indices trading
Below is an example of how gold mining stocks follow the movements in gold price – but not religiously. Fresnillo’s share price largely tracked the movements of gold until two years ago when it recorded gains outstripping gold prices.
