How to Trade Gold and USD? Gold and USD Correlation

by Vahid | Technical Analysis | Monday, January 25th, 2010

Almost all forex traders know that Gold and US Dollar markets move against each others. It means when gold price goes down, USD goes up and visa versa. Therefore USD and gold are highly correlated and their correlation is even stronger and more reliable than the correlation that different currency pairs have. Now the question is if this strong correlation can be used in trading either gold or USD or both. The answer is yes. Gold and USD prices move against each other. When gold forms a buy signal, USD forms a sell signal, but the good thing is that sometimes the signals that one of them forms is ahead of the other one and so it can be used as a leading indicator to trade the other one.

The below chart shows the USD and gold price at the same time. As you see there are many cases that a support/resistance level breakout in gold is followed by a resistance/support level breakout on USD and visa versa. There are also many cases that they form an opposite signal almost at the same time, but even in those cases their signals can be used as confirmation to trade either gold or USD.

Gold USD Correlation

How to Trade Gold and USD Using the Gold-USD Correlation?

First, you have to open both gold and a USD cross currency pair (like USD-CHF) price charts on your trading platform at the same time. Both of the price charts have to be set to the same time frame, for example one hour. Then you have to analyze both of the price charts, based on the trading system that you have. For example I use support/resistance breakout. So all I have to do is finding a support/resistance line on one of the gold or USD-CHF price charts and waiting for the breakouts. Sometimes you can find a resistance line on gold, but you can not see any visible support line on USD-CHF. However, the resistance breakout on gold will be followed by a sell signal on USD-CHF and so when gold goes up, USD-CHF goes down. The resistance breakout on gold can be used as the confirmation of the sell signal on USD-CHF and visa versa. So you can trade any of them that you like, while you have a confirmation from the other one. Lets look at some examples.

On the below chart, a resistance breakout and so a buy signal formed on the gold one hour chart. While there is no special support line on USD-CHF price chart, it formed a strong sell signal by the candlesticks and went down strongly. Trade setups like this occur almost everyday on different time frames.

Gold USD-CHF

The below chart shows a case that a support breakout and so a sell signal formed on gold price chart, several hours before the resistance breakout on USD-CHF. A support breakout formed on gold 4 hours chart by 2010.01.12 20:00 candlestick. Although it went up to retest the broken support line, it finally formed a sell signal below the broken support line and also the Bollinger Middle Band by 2010.01.14 4:00 candlestick and started going down strongly. At the same time USD-CHF started going up too, but it broke above its only visible resistance line on the price chart, about 4 days after that.

Gold USD-CHF 4hrs (4 hours chart)



Was this article useful?
Let my latest articles be delivered to your inbox automatically. Enter your email address here and click on the subscribe button. You can unsubscribe at any time and your email will not be given to any third party:


You can also subscribe for my feed:  Subscribe in a reader

Did you know that ...
... you can learn to trade Forex and make money at the same time? Click Here to learn how.

Further Reading:

 
3 Comments:
post a comment
Comment by IroquoisFX
2010-01-26 01:50:58

Indeed that’s a good way to do it. You also can use the Dollar Index (USDX on most platform) and trade almost any USD related currency with it as a reference.

Reply to this comment
 
Comment by Fitz
2010-02-01 08:17:21

Hi Vahid,
I was wondering if you used MT4 to create your gold,USD/CHF correlation chart? If so how can I plot the multiple crosses like you have done?

Reply to this comment
Comment by Vahid
2010-02-01 18:35:16

Hi Fitz,

Yes it is MT4. You just need to open the USD-CHF and gold price chart and then go to the top menu at Wondiw > Tile Horizontally

Unfortunately MT4 is not able to plot anything on both of the charts at the same time. So you have to find the related candlestick and do it on each of the charts.

Reply to this comment
 
 
Name (required)
E-mail (required - never shown publicly)
Your Comment (smaller size | larger size)





© 2009 vTrades Inc.
Forexoma.com website is maintained by vTrades Inc. which is a company owned and operated by Vahid.
Read the Disclaimer and Risk Warning before using www.forexoma.com information, products and services.
You may post a link to the articles contained on this site, however, you are not allowed to post full articles from www.forexoma.com on any other website or blog. Violators will be prosecuted.