After a relatively long period of calm, Gold has come back from the dead. Half way through February, Gold prices have spiked by more than 12%. This, of course, has got some traders scratching their head, wondering where the heck the spike came from… as if Gold moves materialize out of thin air.
Well, Gold moves don’t just “happen.” In fact, the latest spike in Gold price provides some powerful trading lessons on trading Gold.
Charting Gold Volatility with MT4
Before we jump into the lessons to be learned let’s first focus on the cycles of Gold. That should help explain the latest Gold Spike. Despite what you may have heard, Gold does have cycles. Surprisingly, the cycles are not in the price itself but in the level of volatility. In the past, I expanded on the advanced use of derivatives to predict an upcoming Gold move and direction. But the lesson here is far simpler.
In the weekly Gold chart below, we have measured Gold’s volatility through Standard Deviation (or StdDev), which is available in MetaTrader.
As one can see, Gold’s StdDev is remarkably simple to analyze. Every time the StdDev falls to 20 it jumps back up. And every time Gold’s StdDev jumps to 80 it falls down, back to the 20 low. The only exceptions were two extreme cases when the StdDev reached 145.
Moreover, we can see that if StdDev has hit lows more than once the spike of volatility higher is almost certain.
First Trading Lesson
Of course, our StdDev analysis is not unique to the latest spike. But what can we learn? The first interesting lesson is that volatility spikes tend to concentrate around resistance/support levels. In our case, that is the 1,050 support, aka Point A. That means that Gold opportunities tend to occur around support and resistance levels. Now, it may seem an obvious conclusion but here is what it actually means:
When you have a support or resistance level and StdDev is at 20 that’s the ideal time for entry. You will have both textbook support and resistance levels working smoothly. Then you’ll know that a strong momentum is coming.
The second lesson is a simple but important one. A spike in Gold volatility does not necessarily mean a break of support and resistance levels. When technicals suggest that the support level will hold look at the StdDev. If the StdDev is at 20 that’s good; it re-enforces that simple fact that the support level will hold.
The third lesson, which combines the first two, is perhaps the most interesting. It is the understanding that one jump in StdDev is not equal to one move. Let me elaborate; say StdDev has hit the 20 low near the 1,050 support. Meanwhile, Gold prices have spiked but StdDev hasn’t yet reached the 80 high. That means that volatility is set to rise but it doesn’t necessarily mean that Gold will keep moving in the same direction.
Rather, it means it will just move with a strong momentum. In the case above we can see Gold has hit the upper price channel resistance at Point B. But StdDev suggests volatility still hasn’t been maximized. And that means that the rise in volatility, next time, could come in the form of a short.
What Did We Learn?
So if we take our three lessons and try to summarize them, what did we learn? We learned that when StdDev is at its 20 lows it’s the best time to trade Gold. That’s because it guarantees that you will get a strong price momentum and it validates your technical analysis on Gold.