Day-Trading Gold ETFs: Top Tips

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Day-Trading Gold ETFs: Top Tips

Gold exchange-traded funds (ETFs) are one of the most straightforward methods to trade gold. There are gold ETFs with high liquidity, and unlike futures, they do not expire. Gold ETFs also provide diversification: you may trade the price of gold or an ETF tied to gold producers. Gold, like all other assets, follows long-term patterns. At various points, these trends attract a significant number of traders, resulting in the best day-trading circumstances. Here’s how to make the most of it.

Key Takeaways

  • Gold follows long-term patterns, making it appealing to a wide range of traders and offering excellent day-trading circumstances.
  • Technical analysts may trade gold using a variety of gold-tracking assets, such as ETFs, unit investment trusts, and gold mining stocks.
  • While ETFs indirectly follow gold prices via derivatives contracts owned by the fund, unit trusts such as GLD and IAU acquire and keep real gold.
  • Understanding the price behavior of these various instruments may aid in identifying entry and exit locations for short-term trades as well as confirming trends and reversals.

ETFs vs. Unit Trusts

While SPDR Gold Trust (GLD) and iShares Gold Trust (IAU) are often referred to be ETFs, they are really unit trusts. These UITs (unit investment trusts) genuinely hold physical gold. An ETF, on the other hand, is a fund that often invests in items that follow the price of gold, such as gold futures. ETFs and trusts are both suitable for day trading.

The aforementioned are the most liquid and actively traded gold investment trusts, with an average of more than 8 million and 17 million shares changing hands daily. The iSharesGold Trust is around one-tenth the price of the SPDR Gold Trust, so it will have less intraday fluctuation in absolute dollar terms, but the lower price allows for greater trades. The SPDR Gold Trust’s pricing and volume make it more suitable for day trading.

The VanEck Vectors Gold Miners ETF (GDX) and VanEck Vectors Junior Gold Miners Fund are two popular gold-miner ETFs (funds that acquire gold-miner equities and reflect their performance) (GDXJ).

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When to Day-Trade Gold Trusts and ETFs

Volatility is a trader’s best friend. The combination of frequent price movement and liquidity increases the possibility for earnings (and losses) in a short period of time.

When the daily price of gold fluctuates by at least 2%, invest in gold ETFs and trusts. Apply a 14-day average true range (ATR) indicator to a gold daily chart, then divide the current ATR value by the current price of the ETF or trust and multiply by 100. If the figure is less than 2, the market is not suitable for day trading gold ETFs or trusts.

Gold Miner and Junior Gold Miner ETFs tend to be more volatile than gold trusts. Because of their larger volatility, gold miners may provide significantly more day-trading chances when the price of gold is stable.

Image by Sabrina Jiang © Investopedia2021

The day-to-day fluctuation during the downturn on the left in Figure 1 is frequently more than 2%. (ATR reading divided by price).As the price goes into a more horizontal pattern at the end of 2013, the daily movement falls below 2%, but the ATR continues to fall. In this situation, there will most certainly be fewer intraday chances and less profit potential than when the ETF is more volatile.

Day-Trading Gold Miner ETFs and Gold Trusts

Pay attention when the SPDR Gold Trust moves more than 2% each day. Trade one of the gold-miner ETFs if the trust is moving less than 2%. Although these are the preferred circumstances for day trading, gold trusts and ETFs may be traded using the following strategy even when the market is non-volatile (less than 2% daily change).

Trades are only entered in the direction of the trend. For an uptrend, the price must have just achieved a swing high, and you are aiming to enter on a retreat. The price must halt for at least two or three price bars at some point throughout the downturn (one- or two-minute chart).A pause is a brief consolidation in which the price pauses moving downward and moves more horizontally.

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After the pause, purchase when the price breaks above the pause’s high, since we will anticipate the price will continue to rise. The low of the pause must be higher than the low of the previous swing. If it doesn’t, it’s a sign that the uptrend is in jeopardy, and no trade is entered. After the entrance, set a stop loss immediately below the trough of the pullback:

Image by Sabrina Jiang © Investopedia2021

The strategy for a downtrend is the similar; the price must have just hit a low drop, and you are aiming to enter on a retreat (in this case, the pullback will be to the upside).The price must halt for at least two or three price bars at some point throughout the downturn (one- or two-minute chart).Short-sell when the price breaks below the pause’s low after the pause has happened, since we will anticipate the price will continue to trend downward. The high of the pause must be lower than the high of the previous swing. If it doesn’t, it’s a sign that the downtrend is in jeopardy, and no trade is entered. After the entrance, set a stop loss immediately below the trough of the pullback.

Day-Trading Gold Targets and Pitfalls

The approach seeks to capitalize on trending movements in gold-related ETFs and trusts. This should preferably be done when the market is sufficiently volatile. Otherwise, the trends are more likely to fizzle out and fail to meet our profit objective.

The profit objective is determined by multiplying our risk by a factor of two. When daily volatility is close to 2%, choose a profit objective that is two times your risk. When volatility hits 4% and there is a strong intraday and daily trend, choose a profit objective that is three or even four times your risk.

Figure 2 shows a long transaction at $122.33 with a stop at $122.25, resulting in a risk of 8 cents per share. As a result, a goal of $122.49 is set 16 cents (2 x 8 cents) above the entry price. During periods of more volatility, the objective might be raised to 24 or 32 cents above the entry price (three or four times risk, respectively).

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The plan is not without flaws. One of the key difficulties is that the halt inside the pullback may be extremely big, resulting in a high stop and risk. Within a downturn, there may be numerous pauses; deciding which one to trade might be difficult. If there is no pause, but rather a rapid retreat followed by a fast advance back in the current direction, the approach will leave you without a trade.

To reward traders for assuming that risk, the profit objective is set at a multiple of the risk. However, before the objective is met, the price may exhibit symptoms of reversal.

Optionally, change the stop to just below new lows as they occur during an uptrend, or just above new highs as they form during a downtrend. The stop is following the trend and helps to lock in part of the profits or lessen the loss if the trend reverses.

The Bottom Line

Because gold isn’t always popular, day traders should avoid gold ETFs and trusts when the price of gold is scarcely changing. When volatility rises, though, day trading is justified. Concentrate on trading with the trend. Wait for a price pullback and pause. The pause serves as the signal to join the transaction. Take the trade when the price breaks out of the pause/consolidation and returns to the prevailing direction. Set a halt close outside the price pause. Set an objective that is two times your risk—or maybe higher in volatile conditions—to compensate for the risk you are incurring.

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