Trade Example – XAU/USD (Gold)

Filed under: Learn Forex Trading |
Figure 1.

Figure 1.

There is a possible trade setting up on the XAU/USD pair at the moment (which is the pair for gold). Figure 1 shows the setup in question. This is the daily chart for the XAU/USD pair, and in the middle of the chart I have drawn a horizontal green band to show a very strong area of support/resistance. I have zoomed out on this chart to show several months’ worth of data. For several months now, this pair has been quite bearish, with the 8-day exponential moving average mostly crossed below the 21-day exponential moving average (until very recently). The level of support/resistance I have marked in has been particularly strong, and has already been respected both as support and resistance on a couple of occasions.

 

As a result, when price approached this level once again, I had been watching this level for any price action signals to tip us off that the bearish momentum might once again be taking over. What is interesting is that once price reached this level, an inside bar setup formed. This suggests that the market is consolidating at this level and taking a breather.

 

One way in which this could be played is to go short at the break of the low of the mother candle of this inside bar. A stop loss could be placed just a few pips above the high of the mother candle, and a target of two times the risk could be aimed at. However, this is only really a setup for more advanced traders, as there are often false breaks of inside bars (sometimes known as ‘fakeys’). So this is something that we must always be wary of. Another reason why I did not take this trade is that the 8-day exponential moving average is crossed above the 21-day exponential moving average – so we would be essentially going against this bullish momentum if we took on this trade.

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