Step-By-Step Guide to Building a Winning Gold Trading Strategy
Updated: Nov 16
In the today's article, I will teach you how to create your first profitable gold trading strategy from scratch.
Step 1: Choose the type of analysis
The type of analysis defines your view on the market.
With technical analysis you rely on patterns, statistical data, technical indicators, etc. for making trading decisions.
Fundamental analysis focus on factors that drive the prices of gold such as micro and macroeconomics, news and geopolitics.
A combination of technical and fundamental analysis implies the application of both methods.
For the sake of the example, we will choose pure technical approach.
Step 2: Specify the area of analysis
Technical and fundamental analysis are complex and multilayered subjects. That is why it is crucially important to choose the exact concepts and techniques that you will apply in gold trading.
For example, with a technical analysis, you can trade harmonic patterns, or apply a combination of key levels and technical indicators.
With fundamental analysis, you can build your trading strategy around trading the economic calendar or important news releases.
Here we will choose support & resistance levels and smart money concepts.
Step 3: Select a trading time frame
Your trading time frame will define your trading style. Focusing on hourly time frame, for example, you will primarily catch the intraday moves, while a daily time frame analysis will help you to spot the swing moves.
You can also apply the combination of several time frames.
We will choose the combination of a daily and an hourly time frames.
Step 4: Define your trading zones
By a trading zone, I mean an area or a level on a price chart from where you will look for trading opportunities.
For example, a technical indicator trader may apply moving average as the trading point.
For the sake of the example, we will choose support and resistance levels on a daily time frame as our trading areas.
Step 5: Choose confirmations
Confirmation is your entry reason. It is the set of conditions that indicates a highly probable projected outcome.
For an economic calendar traders, the increasing CPI (inflation) figures can be a solid reason to open a long position on Gold.
Our confirmation will be a local change of character on an hourly time frame.
Step 6: Define your stop loss placement, entry and target selection and desired reward to risk ratio
You should know exactly where should be your entry point, where will be your stop loss and where should be the target.
We will open a trading position immediately after a confirmed change of character, stop loss will lie below the lows if we buy or above the highs if we sell.
Target will be the next daily structure.
Minimal reward to risk ration should be 1.5.
Step 7: Define Your Lot Size and Risk Per Trade
You should have precise rules for the calculation of a lot size for each trade.
For our example, we will strictly risk 1% of our trading deposit per trade.
Step 8: Set trade management rules
When the trade is active, trade management rules define your action:
for example, whether you strictly wait for tp or sl, or you apply a trailing stop loss.
In our strategy, we will move stop loss to entry 10 minutes ahead of the release of the US news in the economic calendar.
Step 9: Back test your strategy
Study the historical data and back test at least 50 trading setups that meet your strategy criteria.
Make sure that the strategy has a positive win rate.
Step 10: Try a trading strategy on a demo account
Spend at least a month on demo account and make sure that you obtain positive overall results.
If you see consistent profits on a demo account, it is the signal for you that your strategy is ready, and it's time to start trading on a real account.
In case of negative results, modify your trading conditions and back test them again, or build a new strategy from scratch.