Trend following in gold trading

Trend following is an approach that does not try to predict turns. It enters in the direction of an established trend and stays in until the trend shows signs of ending, typically using moving averages, channel breakouts or trailing stops. Profits come from a minority of large winning trades that cover many small losses.

How it applies to gold trading

Gold has a history of long, persistent trends driven by macro forces such as real yields, the dollar and central bank demand. Trend-following systems on daily charts aim to capture those moves. Typical tools are the 50 and 200-day moving averages, Donchian breakouts, ADX filters and ATR-based trailing stops.

The hard part is psychological. Win rates are often 30% to 45%, sideways years produce strings of small losses, and the big winners require holding through pullbacks of several hundred dollars on the daily chart.

Worked example

Example (hypothetical numbers): a system buys when gold closes above its 50-day high and trails a stop at 3 × daily ATR. Over a year it takes 12 trades: 8 lose an average of $40 per ounce and 4 win an average of $150. On 0.05 lots: 4 × 150 × 5 − 8 × 40 × 5 = $3,000 − $1,600 = $1,400.

A common mistake

Taking profits early on the winners. The few big trends pay for everything; cutting them short breaks the method.

See also: Donchian channels, Moving average, ATR trailing stop, ADX.

Frequently asked questions