Does technical analysis really work in Gold trading?
In this article, we will discuss whether the traditional, classic methods of technical analysis: support and resistance, breakouts, patterns can be reliable in this specific market.
We will explore the dynamics of Gold prices so far this year and discuss the most efficient way to trade Gold.
So if you are a gold trader or simple interested in the market analysis, you should not miss this eye-opening discussion!
First, let's discuss how Gold market behaves from the beginning of the year from technical analysis perspective.
Gold started this year in a strong bullish trend, the market opened after setting a new higher high on a daily the second of January.
After a formation of a higher high, the market became overbought and a correctional movement initiated. The price formed a bullish flag pattern and reached the level of the last higher low - a very important support.
After the test of structure, the price bounced and violated a resistance line of a flag with a strong bullish candle.
From the technical perspective, it was a very strong trend-following signal and a bullish continuation was anticipated.
However, it turned out that it was a false signal, and instead of going higher, the market dropped, setting a new lower low.
Why this false signal is so important is that the breakouts, key levels and price action analysis are the most reliable on a daily time frame.
Such a strong combination: bullish trend, bullish pattern, key support; has a very high accuracy on a daily.
That was the first time this year, when technical analysis on a daily was completely screwed.
It felt like the market was turning bearish.
The price violated a level of the higher low, setting a new lower low.
For Smart Money traders, it is a very important event that is called a Change of Character. It strongly confirms a bearish reversal on the market. Learn More About Change of Character
One more bearish confirmation that I spotted was a completed head and shoulders pattern formation with a confirmed violation of its neckline. That signal also confirms a bearish reversal.
And again, these 2 bearish confirmations were the false signals.
The price went back above the neckline and a bullish movement initiated.
This time, a classic price action pattern did not work, and smart money concepts gave a false signal.
Then I spotted a very bullish signal - the price violated a major falling trend line and closed above that.
It clearly indicated that the market was returning to a global bullish trend.
And again, that signal was completely false.
And the price dropped.
Trend line breakout in the direction of the trend - a classic trend-following confirmation did not work.
Then we saw 2 strong bearish signals: a bearish breakout of a rising trend line and a key horizontal support with a high momentum bearish candle. It felt like now it confirms that the market is bearish and it should drop lower to the closest key support.
And again, technicals failed miserably and after a retest of a broken horizontal structure and a trend line, the price just went higher completely neglecting them
From the beginning of the year, technical analysis: key levels, patterns, smart money, breakouts do not work on a daily.
All the signals that were spotted so far failed.
If you just started trading, you may easily come to the conclusion that technical analysis does not make any sense on Gold.
And you will be completely right, in that period it does not work at all.
I am trading Gold and Forex for more than 9 years, and year after year I noticed that there always are the periods when some techniques, some strategies do not work. Sometimes these periods are very short, but some time they can be quite long.
The only proven way to overcome such periods is consistency and proper risk management.
Risking a tiny portion of your trading account per trade, you will be able to survive the stubborn market.
What causes such irrationality of the market, I don't know, and I guess no one does. Here is what Chat GPT says: "One key reason is the influence of human emotions and behaviors on market movements. During times of extreme fear or greed, market participants may make decisions that deviate from rationality, leading to unpredictable market movements that may not adhere to traditional technical analysis patterns."
The market always returns to normal conditions and starts respecting the technicals again. However, no one knows when.
There is a famous quote by John Keynes:
"Markets can remain irrational longer than you stay solvent".
And only proper risk management will keep you solvent longer than the market stays irrational.
