Technical Trading Indicators in XAUUSD Trading (Part II)

Gold is a highly liquid tool with an average day-to-day trading volume of over US $140 billion. As gold is exceptionally liquid, traders can appreciate very tight spaces, particularly during the height of the US and London trading sessions.

Technical Trading Indicators in XAUUSD Trading (Part II)

But to make the most of the profitable trading states that gold recommendations, traders may utilize technical indicators to assist in deciding the right trading approach.

Technical indicators are heuristic or pattern-based signals created by the cost, volume, and open curiosity of a security or agreement utilized by traders who pursue technical analysis. In the following, we examine two technical indicators together and explore the components of each.

Moving Average of Oscillator (OsMA)

The moving average of an oscillator (OsMA) is a technical indicator that displays the difference between an oscillator and the moving average of that specific oscillator (Mitchell, 2021). One of the examples of an oscillator used in this indicator is the moving average convergence divergence (MACD) presented in a histogram. The histogram is formed based on the difference between the signal line (oscillator) and the MACD line (moving average). Traders often use OsMA to discover viable trend signals to extend a position in the market. It is known that the moving average (MA) tends to move slower than its oscillator. Hence an increasing OsMA is bullish as the prices rise, and vice versa. In addition, if the OsMA shifts from negative (below 0) to positive (above 0), it may forecast an uptrend will start and that the cost will grow. On the other hand, if the OsMA moves from positive to negative, a downtrend will start, and the price will fall.

The formula for OsMA:

𝑂𝑠𝑀𝐴 = 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑂𝑠𝑐𝑖𝑙𝑙𝑎𝑡𝑜𝑟 − 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑀𝑜𝑣𝑖𝑛𝑔 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 (𝑀𝐴)

Parabolic SAR

The parabolic SAR (Stop and Reverse) was designed by J. Welles Wilder Jr. and used as a trading strategy to help traders identify the trend's direction and find possible reversals (Murphy, 2019). The indicator can be seen on the trading chart as a series of dots, where a buy signal would take place when the dots move from above the price toward the below the price, and a sell signal would take place when the dots move from below the price towards the above price (Mitchell, 2021). However, for the parabolic SAR to work more effectively and produce better

results, traders might use the indicator along with the other technical indicators such as the moving average (MA) or trend line as a support.

Stochastic Oscillator



The stochastic oscillator is another well-known technical indicator developed by George Lane used to locate oversold and overbought signals over some time (Hayes, 2020). The stochastic oscillator follows the speed of the price changes and momentum, with the range always between 0 and 100. An overbought signal is

considered above 80, and an oversold signal is below 20. Traders can adjust the period of the stochastic oscillator according to their specific needs; however, the most common period used is 14 days.

One of the disadvantages of using the stochastic oscillator is during volatile market situations, which often happen in the foreign exchange (FOREX) market. As a result, false signals are given, which would cause traders to lose their money.

Money Flow Index (MFI)

Like the stochastic oscillator, the Money Flow Index (MFI) is another type of technical momentum indicator that can determine overbought and oversold signals for an asset that fluctuates between 0 and 100, making it an oscillator (Mitchell, 2021). However, the money flow index combines price and volume data instead of just the prices like the relative strength index (RSI). Due to this reason, the money flow index is often called the volume-weighted relative strength index (RSI). In addition, the indicator can also locate positive and negative divergences (Mitchell, 2020). There are two variations in the Money Flow Index (MFI); a bullish divergence occurs when the price changes to a new low, while the MFI shows a higher low. This indicates that there is a decrease in the selling pressure, and this would be a good chance for traders to make a buy position as other buyers are also expected to be taking over the market.

On the other hand, the bullish divergence of the MFI occurs when the price changes to a new high while the MFI shows a lower high. This indicates that the buying pressure is decreasing and that traders should open a sell position. In addition, there is also a term failure swings, in which traders entirely rely on the

MFI and ignores the price changes. Several steps indicate a bullish MFI failure swing and a bearish MFI failure swing;

Bullish Money Flow Index (MFI) failure swing:

1. MFI is oversold ( < 20)
2. MFI recovers and increases above 20
3. MFI goes down but stays above 20
4. MFI rises above the previous high.

Bearish Money Flow Index (MFI) failure swing:

1. MFI is overbought ( > 20)
2. MFI falls below 80
3. MFI instead goes up but remains below 80
4. MFI drops below the previous low

The equation for calculating the MFI: 

𝑀𝑜𝑛𝑒𝑦 𝐹𝑙𝑜𝑤 𝐼𝑛𝑑𝑒𝑥 = 100 − 100 / (1 + 𝑀𝑜𝑛𝑒𝑦 𝐹𝑙𝑜𝑤 𝑅𝑎𝑡𝑖𝑜)

Where:

𝑀𝑜𝑛𝑒𝑦 𝐹𝑙𝑜𝑤 𝑅𝑎𝑡𝑖𝑜 = 𝑃𝑒𝑟𝑖𝑜𝑑 𝑃𝑜𝑠𝑖𝑡𝑖𝑣𝑒 𝑀𝑜𝑛𝑒𝑦 𝐹𝑙𝑜𝑤 / 𝑃𝑒𝑟𝑖𝑜𝑑 𝑁𝑒𝑔𝑎𝑡𝑖𝑣𝑒 𝑀𝑜𝑛𝑒𝑦 𝐹𝑙𝑜𝑤

𝑅𝑎𝑤 𝑀𝑜𝑛𝑒𝑦 𝐹𝑙𝑜𝑤 = 𝑇𝑦𝑝𝑖𝑐𝑎𝑙 𝑃𝑟𝑖𝑐𝑒 ∗ 𝑉𝑜𝑙𝑢𝑚𝑒

𝑇𝑦𝑝𝑖𝑐𝑎𝑙 𝑃𝑟𝑖𝑐𝑒 = 𝐻𝑖𝑔ℎ + 𝐿𝑜𝑤 + 𝐶𝑙𝑜𝑠𝑒

Conclusion

The most affordable gold reserves—at least presently known—have already been prospected and placed into the international supply. The remaining gold reserves mean more costly mining functions, reducing businesses' profit potential.

Although different aspects than typical forex currencies influence gold costs, many rules for evaluating forex currencies still apply.

Forex traders should assume XAU/USD is a proper shelter for their investment training and a potential gain source if they can study gold's price movements and create a trading approach to capitalize on this opportunity.

Conclusion

Gold is a highly liquid tool with an average daily trading volume of over US $140 billion. As gold is very liquid, traders can appreciate tight spreads, specifically during the height of the US and London trading sessions. 

But to make the most of the favorable trading states that gold requests, traders may utilize technical indicators to help determine the suitable trading technique.