Technical Analysis Basis - Technical Analysis in Gold Trading
Technical analysis is based on 3 factors common when trading the Gold price charts. These 3 common factors when it comes to the Gold trading market are:
- Prices Move in Trends
- Price Action Discounts Everything
- History Tends to Repeat Itself When it Comes to Price Moves
Prices Move in Trends
Gold price movements follow trends - a trend is a general price direction either upward or downward. When it comes to Gold the prices of Gold follows trends and this means that once a trend in a particular direction is formed then prices keep moving in that direction for a period of time and the future movement of price is likely to be in the same direction as that of the Gold price trend than for it to be against it. Most of the Gold trading strategies are based around this concept.
Therefore technical analysis in Gold will be the study of how to determine this market trend in order to know which direction the prices of Gold are likely to move next and therefore help the trader to know which side of the trade to take.
Price Action Discounts Everything
When it comes to technical analysis, the only factor considered in this analysis is the price movement or what is commonly referred to as price action. Technical analysis study assumes that at any one given time, the price of Gold reflects everything that has or could affect the movement of the Gold prices. This technical analysis therefore only studies the price action - which is the product of Supply and Demand of Gold.
History Tends to Repeat Itself When it Comes to Price Moves
History tends to repeat itself mainly in the patterns of the price action. This repetitive nature of the price patterns is attributed to investor psychology. This is because the traders participating in the trading of Gold tend to provide a consistent reaction to the market for most of the times. Technical analysis study uses these price patterns that are commonly referred to as chart patterns to analyze the movement of Gold prices. Although the chart patterns represent historical data these patterns are still relevant because they show patterns that often repeat themselves.
Understanding technical analysis when trading Gold prices can be a helpful method that traders can use in determining when the market is trending and when it is not trending. When the prices of Gold are moving in one particular direction then as a Gold trader you want to be on this trade - but if the market is not trending then as a trader you do not want to be trading in this market because all you will do is lose money because you will be caught by many whipsaws and as investors this is not what we want.
Unfortunately, most of the traders try to fight the market trends and buy or sell in the direction that is the opposite of these market trends - in an effort to pick a market top or market bottom, only to see the market move further in the direction of the continuing trend.
Another common mistake that traders make when they are caught up in the wrong market direction is to add on to losing positions in the hope that once the market trend reverses they will make money faster by averaging down their losses.. This is however not a good strategy especially in a strongly trending market - it is something that the experienced investors never do, because they know that once prices start moving in a particular direction they continue moving in that direction for quite some time. "The trend is Your Friend" is a popular saying among investors, never go against the trend.
This study of technical analysis aims at alerting traders and investors of high probability trading setups that traders can use to determine when to open trades. Profits in trading the online Gold market comes from using proven methods to find the trend direction and taking trades in the same direction. However, there are no certainties in the market and traders must practice until they come up with high probability trading setups that they can use to trade the online Gold market profitably. One way of doing this is by opening a practice demo trading account and practice trading strategies on this practice account until traders learn how to generate profits using the high probability setups that they will have come up with after learning more about the various technical analysis concepts used in trading Gold.
About Technical Analysis
With so many investors and traders using the same technical analysis tools, the technical analysis becomes a self fulfilling prophecy. This is because if so many investors use the same level as a buying point, the Gold price then moves upwards as everyone makes similar moves at the same time.
The next question is how long these moves will last and therefore traders must come up with methods understanding gold chart moves so that they can know how to determine when to open and when to close their trades.
When it comes to analyzing this Gold prices, the Gold charts are used together with technical indicators to look for patterns that have occurred in the past under certain conditions and when these chart patterns are noted again under similar conditions then traders can use these setups to determine whether to open buy or sell trades - and traders will be making trading decisions with increased probabilities of success because these trade setups have happened before, and made price to move in a particular direction - and traders can trade based on the same setup as before.
Learning How To Trade Gold Prices Successfully with Technical Analysis
To learn how to Gold successfully using technical analysis it is important to understand the 3 strategies outlined below:
- Gold prices will always follow a trend that can be identified by looking at the price patterns of Gold prices. In financial trading Gold as well as other financial instruments the only proven method to consistently make profits in the online trading markets is by following a trend. "The trend is Your Friend" is a popular saying among investors and traders because following trends when trading chart patterns is the most consistent method of making profits when trading Gold and other financial instruments, as a trader, never go against the trend.
- The market forces of supply and demand for Gold will drive the prices of Gold up or down depending on the prevailing factors. The demand for Gold may go up when the world economy is doing well and people have more money to spend on luxury items. Technical analysis study will seek to measure these demand and supply based on the current chart patterns of Gold prices and with the help of the various technical indicators. The supply and demand of Gold will be reflected in the price action - therefore by simply looking at the price movements traders can predict what direction the price of Gold is likely to move towards. Traders can also use an additional indicator like the moving average, the RSI or support and resistance levels indicators to help them determine the next likely direction of the Gold price charts.
- The market not only shows the history of the past prices, but will also follow the trend that was in place until its direction reverses. Traders can use technical indicators such as the moving averages, Bollinger bands or trend lines technical analysis tools and indicators to help them determine the current market trend direction.
On the other hand, when there is no direction, when there is no trend and the market starts to move in a sideways manner - the market is said to be consolidating. When the market starts to consolidate, traders should wait until the market stops consolidating as during this time there will be no trend to trade and prices will keep oscillating in one place without moving in any particular direction.
Once the consolidation stops prices will start moving in one or the other direction and new trends will be formed and traders can start placing trades in the direction of the newly formed trend.