By Ahmad Hassam
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. Like the present financial crisis when the global economy is in recession, many investors are trying to take refuge in gold as the ultimate safe haven of their wealth from financial turmoil. Many countries are also purchasing gold in the open markets.
The Australian Dollar is known for its strong correlation with gold prices. Most of this is due to the amount of gold that
The opposite is also true. When US Dollar gains value, gold usually loses value and the pair AUD/USD depreciates. So when gold prices are rising, we can execute long trades on AUD/USD. Likewise, when gold falls in value, we can sell short AUD/USD currency pair. This relationship provides us with a method to take advantage of the fundamental factors that affect the currency markets. 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.
Entering a trade to follow gold is a three step process. We will use RSI (Relative Strength Index) as the technical indicator to trigger our trade. If you have read the previous article on following oil, we had used the CCI (Commodity Channel Index).
When both gold and oil are commodities, why is that we are now using RSI instead of CCI? It all depends on how quickly the two indicators react to volatility. CCI gives a quicker signal. This is good for relatively less volatile pairs. Whereas RSI gives slower signals, this is ideal for more volatile pairs like AUD/USD.
You should use a moving average to confirm if gold is in an uptrend or a downtrend. You will use the seven periods RSI on AUD/USD chart. Watch the RSI chart 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.
You should 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, you should enter a short trade on AUD/USD pair if the gold prices are declining and the RSI is crossing below the 70 line.
You should set a limit order of 200 pips. You should also put a stop loss order of 50 pips for the trade. This risk to reward ratio is good and is (=50/200). The chances are you are going to make $2000 profit (200 pips is equal to $2000 on a standard lot) if the trade goes as you had anticipated. And if the trade does not go in your favor you should be prepared for a $500 loss (500 pips equal $500 on a standard lot). 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. - 23309
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.
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Tags: Gold / OiL
