Trade Example – Gold (XAU/USD)

Filed under: Learn Forex Trading |

There was quite an interesting contrarian trade setup that occurred on the XAU/USD pair recently, which for those of you that don’t know is the exchange rate between gold and the United States dollar.

 

Figure 1.

To begin with, take a look at Figure 1. This is the daily chart for gold. What you can see is that price had been moving up, with the 8-day exponential moving average crossing above the 21-day exponential moving average. However, there is an area of resistance that is going to prove to be very difficult to break through, and this I have marked with a green band. Price previously failed to break through this level, and it is now making a second attempt.

Figure 2.

 

If price closed above this level on the daily chart, then the level will have been broken and we might think about initiating a long trade. However, if you now look at Figure 2, which is the 4-hour chart for the XAU/USD pair, you will see that price formed a nice bearish engulfing pattern at this very level. This might have been a good place to put an order in for a short trade at a 50% retracement of the bearish candle, with a stop loss placed just a few pips above the high of the move, and a target of two times our risk. As you can see, the order would have been filled and our target would have been met for a very nice 2% rise on our bank.

 

Contrarian trades are dangerous and as such it is much better for beginner traders to go with the trend rather than against it. But on this occasion, with the level of resistance being so strong, this price action signal provided a high probability forex price action setup.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>