Almost all forex traders know that Gold and US Dollar markets move against each others. It means when gold’s price goes down, USD goes up and visa versa. Therefore USD and gold are strongly correlated and their correlation is even stronger and more reliable than the correlation that different currency pairs have. Now the question is whether 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.
How to Trade Gold and USD Using the Gold-USD Correlation?
First, you have to open both gold’s price chart, 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 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. Let’s 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.
The below chart shows the case that a support breakout, and so, a sell signal is 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.