For the past ten days or so the price of gold has been range-bound, meaning that it has drifted sideways bouncing around between a high of $1,756 and a low of around $1,708 – a level it has touched three times. This type of trading action is typical of gold and although it is frustrating for both the bulls and the bears, there is still a way to profit from it.
How to profit by trading gold
As the chart below shows, gold is currently moving around in a range of about $50 in search of a catalyst to give it meaningful direction. One way to profit from this pattern is to place a buy order (for example via a spread bet) at around $1,712 (you have to allow for the spread and there’s no need to be greedy) with a tight stop loss at around $1,705.
NB: It is vital to always use a stop loss and I would recommend using the “guaranteed” kind.
Clearly your looking for your buy order/s to get filled, and then for gold to once again bounce off support at around $1,708. If this pattern plays out can begin to move you stop up under gold as it moves higher, though you still need to give it plenty of room to move.
A 30 minute 13 day chart of gold (Click on the chart for a larger version)
Charts courtesy of IT-Finance.com
If gold then approaches previous overhead resistance at around $1,750 to $1,755 you should consider tightening your stop. If you placed more than one buy order and several of them got filled the $1,750 area would be a good time to take profit on some of them. You can always let the others run.
Markets only really do two things, they trend or they consolidate (move sideways), and it’s important to recognise these different phases. If gold breaks out in either direction then the pattern on this timescale is invalidated.
Even if gold runs into resistance at around $1,755 I personally don’t feel comfortable going short due to its bullish long-term outlook and the fact that we are now in the seasonally strong period for gold. However I have placed staggered buy orders around the $1,712 area and it is my intention to follow the strategy outlined above.