Day trading gold ETF: important tips

The Gold Exchange Traded Fund (ETF) is one of the easiest ways to trade gold. Gold ETFs with a lot of liquidity, unlike futures, ETFs do not expire. Gold ETFs also provide diversity: trading gold prices, or trading ETFs related to gold producers. Gold, like other assets, moves in a long-term trend. These trends attract a large number of traders at certain moments and provide the most favorable day trading conditions. Here is how to take advantage of this.

Key points

  • Gold moves in a long-term trend, making it attractive to a large number of traders and providing favorable day trading conditions.
  • For technical analysts, trading gold can use multiple types of gold tracking securities, including ETFs, unit investment trusts, and gold mining stocks.
  • Although ETFs track gold prices indirectly through derivative contracts held by funds, unit trusts such as GLD and IAU actually purchase and hold physical gold.
  • Understanding the price behavior of these different instruments helps determine the entry and exit points of short-term trades, and confirm trends and reversals.

ETF and unit trust funds

Although SPDR Gold Trust (GLD) and iShares Gold Trust (IAU) are commonly referred to as ETFs, they are actually unit trusts. These unit investment trusts (UIT) actually own physical gold. On the other hand, an ETF is a fund that usually invests in products that track the price of gold, such as gold futures. Both ETFs and trusts can be used for day trading.

The above are the most liquid and most actively traded gold investment trusts, with an average daily trading volume exceeding 8 million shares and 17 million shares respectively. The price of iShares Gold Trust is about one-tenth of the price of SPDR Gold Trust, so in absolute U.S. dollars, its intraday volatility is small, but a lower price means that more quantities can be traded. The price and quantity of SPDR Gold Trust make it more suitable for day trading.

Popular gold miner ETFs (funds that buy gold miner stocks and reflect their performance) are VanEck Vectors Gold Miners ETF (GDX) and VanEck Vectors Junior Gold Miners Fund (GDXJ).

When to conduct day trading in gold trusts and ETFs

Volatility is the friend of day traders. Frequent price changes, coupled with liquidity, create greater potential for profit (and loss) in a short period of time.

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

Gold Miner and Junior Gold Miner ETFs are generally more volatile than gold trusts. When the price of gold is stable, due to its greater volatility, gold miners may provide slightly more intraday trading opportunities.

In the downward trend on the left side of Figure 1, daily changes usually exceed 2% (ATR reading divided by price). As prices entered a more sideways period at the end of 2013, as the ATR continued to fall, the daily volatility fell below 2%. Compared with when ETFs are volatile, in this environment there may be fewer intraday opportunities and less profit potential.

Day trading gold miner ETF and gold trust

When SPDR Gold Trust fluctuates by more than 2% every day, please pay attention to it. If the change in the trust is less than 2%, then trade one of the gold miner ETFs. These are the recommended conditions for day trading, although gold trusts and ETFs can be traded using the following methods, even during periods of non-volatility (less than 2% daily volatility).

Trading only takes place in the direction of the trend. The price must have recently made a high in an uptrend, and you are looking for a pullback to enter the market. At some point during the callback, the price must pause for at least two to three price bars (one-minute or two-minute charts). A pause is a small consolidation in which the price stops moving downwards and moves sideways.

Once a pause occurs, buy when the price breaks through the pause high, because we will assume that the price will continue to rise. The pause low must be higher than the previous swing low. If it is not, warn that the uptrend may be in danger and no trades will be made. After entering the market, set a stop loss below the callback low:

The strategy for a downtrend is the same; the price must have recently fallen at a low level, and you want a callback to enter the market (in this case, the callback will be an upward move). At some point during the callback, the price must pause for at least two to three price bars (one-minute or two-minute charts). Once the pause occurs, go short when the price drops below the pause low because we will assume that the price will continue to fall. The pause high must be lower than the previous swing high. If it is not, warn that the downtrend may be in danger, and no transaction will be made. After entering the market, set a stop loss below the callback low.

Intraday gold trading goals and pitfalls

This strategy attempts to capture the trend of gold-related ETFs and trusts. Ideally, this should be done when the market is sufficiently volatile. Otherwise, the trend is more likely to lose momentum and fail to reach our profit target.

The profit target is based on the multiple of our risk. When the daily volatility approaches 2%, set the profit target to twice your risk. When the volatility is close to 4% and there is a strong trend on the intraday and daily charts, set the profit target to three or even four times the risk.

In Figure 2, the long trade is at $122.33 and the stop loss is at $122.25, resulting in a risk of 8 cents per share. Therefore, the target price is 16 cents (2 x 8 cents) higher than the entry price, and the target price is $122.49. In the case of large volatility, the target can be expanded to 24 or 32 cents higher than the entry price (three or four times the risk, respectively).

This strategy is not without pitfalls. One of the main problems is that the pause in the callback can be very large, making the stop loss and the risk very large. There may also be multiple pauses in the callback; the choice of which to trade may be quite subjective. If there is no pause-just a sharp pullback and sharp pullback in the direction of the trend-this strategy will prevent you from trading.

The profit target is fixed at a multiple of risk to compensate traders for the risk. However, before reaching the target, the price may show signs of reversal.

An optional step is to move the stop loss below a new low during an uptrend, or move the stop loss above a new high during a downtrend. Stop loss moves with the trend—acting as a trailing stop loss—and is used to lock in some gains or reduce losses when the trend reverses.

Bottom line

Gold is not always popular, so day traders should put gold ETFs and trusts aside when the price of gold hardly changes. However, when volatility increases, intraday trading is necessary. Focus on trend trading. Wait for the callback and the price to pause. The suspension is the trigger to enter the transaction. When the price breaks through the pause/consolidation and returns to the trend direction, trade. Set a stop loss outside of the price pause. Your goal should compensate you for the risk you take; therefore, set a goal that is twice your risk – or possibly higher in volatile conditions.

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