Now that you know the basics of trading gold, do you want to learn other methods to profit from it?
Trading currencies and other financial instruments often involve speculating on price movements. Wouldn't it be great if there's a way to know when your speculations are likely to yield positive results?
This is where the seasonal pattern of gold can prove helpful in your trading goals. Whether you trade gold stocks, futures, or XAUUSD, the seasonal pattern can guide you into making better trading decisions.
What is gold seasonality?
Gold seasonality refers to the times in a year when gold is either stronger or weaker. Such occurrences tend to repeat themselves as winter or summer does but don't fall on the same day or month year after year.
Think of it as Thanksgiving Day in the US that is celebrated every fourth Thursday of November. The actual day will vary from one year to another.
The good news is there are ways to predict when gold is likely to strengthen or weaken.
Based on its seasonal cycle:
- Gold tends to rise in the first quarter and the last months of the year--January, August, September, November, and December. September is known to be the best month to trade.
- Gold tends to fall from February until early April.
Let's look at it from a physical standpoint. That is, the demand for physical gold tends to increase during the wedding season. This is especially true in India. If you take this into account, you might be able to time your trades more precisely, as well as identify the best time to take profit.
If you consider the metals and mining industries, you will also see how their seasonal tendencies correlate with gold. After all, they are driven by demand. This pattern also occurs in the spot markets and gold futures.
Can you trust the seasonal pattern in gold?
Take a look at the chart below. This shows the average monthly performance of gold over a 31-year period, from 1980 to 2011.
You can see a clear repetition on which months gold prices tend to rise, accompanied by the percentage of time that this pattern held true for 31 years. As previously mentioned, September is when gold prices are at their peak.
The operative word, however, is trust. You can believe gold seasonality can happen, but you shouldn't solely rely on it when it comes to your trading decisions. You have to use other tools to increase the accuracy of your trades.
How to make money trading XAUUSD during the gold seasonality
1. Trade gold during the months where the price is above average
Based on the chart, you’ll have a good idea as to when gold prices are likely to rally. Ideally, you should buy gold during the seasonal dip and sell as the price picks up or peaks. For example, you buy gold in March and then sell in August or September.
Another option is to buy at the start of the month where gold is expected to peak and then sell at the end of the month. This strategy is more suitable for traders with a higher risk appetite.
2. Use Fibonacci Retracements to identify significant levels of support and resistance
Combine Fibonacci retracement with the gold seasonal pattern and find buying opportunities. Keep an eye out for when gold retrace from the previous market swing to 0.618 Fibonacci Retracement, which is the inverse of 1.618 or the golden ratio. History shows that the gold price tends to rally after reaching the inverse number.
We’ve also shared in our previous blog how you can use Fibonacci retracement to help you analyse a profitable gold trade. Check it out and learn to identify suitable entry and exit points.
3. Buy at support and above resistance
Buy gold if the price trades at support at the time of your analysis. Do the same when it breaks above the previous resistance. Make sure to place your stop-loss below the previous swing low.
More Tips on How to Trade XAUUSD
There are other trading opportunities outside of the seasonal gold patterns. If you want to trade XAUUSD, you can capitalise on profit potentials in several ways.
1. Trade at the “best times” of the day
There are certain times of the day where liquidity is high or at its peak and considered one of the best times to trade XAUUSD.
These are usually during trading hours in New York and London and during overlaps of the market sessions. During these times, price movements tend to increase, which is why more than half of the total financial transactions online also happen within these periods.
The volume of transactions becomes heaviest during market session overlap. This is usually between 13:00 and 17:00 GMT for the European and US markets overlap and between 7:00 and 9:00 GMT for the Asian and European markets overlap.
2. Trade based on previous highs and lows
XAUUSD is likely to trade in a range, which makes it easy to identify opportunities to buy or sell based on the trading pair's previous highs and lows. As a relatively stable asset, you can expect gold to hit these highs and lows over time. You can then use range-bound strategies to open a position and earn profit from XAUUSD.
3. Look for potential trading opportunities on breakout
Using a symmetrical triangle, along with other technical indicators such as RSI, you can identify areas to trade gold.
The simple chart pattern will show you where consolidation is likely to take place as the two trendlines progress and converge. As the two lines meet, price movement becomes tight and could lead to a potential price breakout.
You can then place an order on XAUUSD on a breakout. Make sure to place a stop-loss below the descending trendline as it passes the convergence point. If XAUUSD successfully breaks out, you can then issue a sell order.
4. Go long on a bullish breakout, short on a bearish breakout
Track the price of gold over a 6-month period. If it has reached a new peak after six months, it's going into a bullish breakout. Go long. If it's the opposite, go short.
Now that you know how to trade the gold seasonality, you should start trading right away. Remember, September is the month when the price of gold is highest.
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