Swing Trading Aud/usd Pair-following Gold In Forex Trading

Everyone wants to buy gold

Everyone wants to buy gold. Gold is the ultimate global currency. US Dollar used to be pegged to gold before 1973. But with the collapse of the Bretton Woods System that year, US Dollar was unpegged from gold. It became a freely floating currency.

Free floating means that there value is determined by the fundamentals of supply and demand in the international currency markets. In the last few years, a lot of paper currency has been printed by governments all over the world to ward off the recession. This includes the US TARP that was meant to save the sinking financial system especially the banks.

The more money that gets printed, the more it loses value. So, in the last few years investors and countries all over the world have been buying gold. Gold is still considered to be the Ultimate Currency. Investors run towards gold in times of financial stability like the present. Countries like China, India and Russia are selling there USD reserves in the international markets and hoarding gold as a hedge. This is driving the gold prices in the global markets higher and higher. Recently, gold prices hit the historic mark of $1,300 per ounce.

On the other hand, USD has an inverse relationship with gold prices. Gold prices rise, USD falls in value. This causes the currency pair AUD/USD to appreciate in value when gold prices rise.

How do you follow gold in currency trading? We now know that AUD/USD pair reacts strongly to gold prices. So we will trade AUD/USD based on following gold.

What this means is that when gold prices are in an uptrend, you should expect the AUD/USD pair to be in an uptrend as well. This is the basis of the following fundamental swing trading strategy.

Now, you know both AUD/USD are strongly correlated. When gold prices are in an uptrend, you must expect this pair to be in an uptrend too. The important thing is when to enter that trend and when to exit. For that we will be using the Relative Strength Index (RSI) Indicator. RSI will give the signal when to enter the trend and when to exit.

First we need to confirm the uptrend in the gold prices. Use moving averages to confirm that there is an uptrend in the gold market. Now, use the Seven Period RSI Indicator on your daily AUD/USD chart. When RSI crosses below the 30 line and then crosses back above the 30 line, enter a long trade. In the same manner when the RSI moves above the 70 line and then falls below the 70 line, enter a short trade.

50 pips stop loss means a $500 loss if the trade does not go in your favor. It is not uncommon to have a trade go against you only to find yourself right back in trade that goes your way.

by: Ahmad Hassam.

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