Talking Points:
- Gold is currently trading well off its 2014 highs
- The 200 MVA creates resistance at $1,301
- Trendlines can also be used with gold, to create an actionable trading plan
Gold (XAU/USD) prices have been confusing many traders for the 2014. Prices immediately broke out toward higher highs, and then promptly slid after putting the current yearly high in place at $1,387. As prices continue moving towards lower lows, traders can use points of resistance to develop an active trading plan.
Gold and the 200MVA
As we discussed in our previous daily trading lesson, moving averages are simple technical tools that can be designated to help determine the trend and support and resistance levels. For example a 200 period MVA can be used as a filter to determine if prices are trending higher or lower. If prices are above the average, the MVA works as support and traders will assume the trend is upward. Conversely, if price is below the MVA, this value will work as resistance and traders will look for new sell based positions.
Adding a 200 period MVA to gold exposes the underlying weakness for the commodity. Traders looking to take advantage of this indicator can see that resistance resides firmly overhead at $1,301.
Trading with a Trendline
Now that we have a directional bias and a level of resistance identified on gold, we can use this in conjuncture with other techniques to develop a trading plan. Below you will see a series of trendline added to our gold chart. First we have a descending trendline creating another barrier of resistance. This line has been created by connecting three previous highs on the metal. When added to our 200MVA we can see a strong confluence of resistance above 1,301.
Trend traders will look for opportunities to sell gold as long as price stays under both values of resistance. Due to the definition of a trend, gold must create a series of lower lows in order for the current downtrend to continue. This will allow traders to first target the next value of horizontal support near 1, 2750. This value could also be added to our resistance line and create a descending triangle. In the event of a price breakout, this pattern suggests prices could move as low as $1,165.
Managing Risk with Resistance
As with any trading strategy, whether you are trading breakouts, range s, or trends there is risk! One of the benefits of identifying resistance is that there is a clear price level to manage risk. In the event that price moves over resistance any positions selling gold should be exited.
Now that you are more familiar with the key price levels on gold, you can practice trading the yellow metal on a demo account. You can get started following gold prices and your favorite currency pairs such as the EURUSD with a Free Forex Demo with FXCM. This way you can develop your trading skills while tracking the market in real time!
---Written by Walker England, Trading Instructor
To contact Walker, email instructor@dailyfx.com. Follow me on Twitter at @WEnglandFX.
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