*Reviewing my very simple chart pattern based short trade on Spot Gold”
In this blog post I am going to show you my pre-trade technical analysis for a short trade position on Spot Gold. This trade was very simple and utilised the quite famous “head and shoulders” chart pattern along with some higher timeframe analysis.
Before I start, let’s look at what the head and shoulders pattern looks like and why it works as a reversal indicator for the direction of price.
The image above shows you a textbook example of the head and shoulders chart pattern. As you can see, it consists of 4 main parts and I believe that the clearer the pattern appears on the price charts you are trading, the more successful the trade will be.
The basis behind this pattern is that price finds a resistance zone and then you wait for the prevailing trend to reverse to enter. The trend reversal being indicated by the lower high forming which is the right shoulder. As always, it is always best to trade with the current trend so buying on higher lows and shorting on lower lows.
TOP TIP! Don’t force it. If you are unsure if the chart pattern looks like the image example shown above, don’t trade it. Wait for a better opportunity.
Spot Gold (XAUUSD) Short Trade – 9th March 2020
As always, I started with a higher timeframe for my analysis and used the daily price chart. You can also track the progress of this trade live on the TradingView platform by clicking on the link below.
The daily price chart for spot gold shows price in a resistance zone around $1695. This is shown by multiple daily wick rejections both the day before I entered my short position but also from the previous trading month. There was significant seller interest at this level.
On the 4hr timeframe (not shown) a large bearish engulfing candle closed below the $1700 price level confirming the seller momentum and short bias.
The chart above shows the lower timeframe 1 hour price chart on spot gold prior to my short trade entry. As you can see, I have the shoulders and head marked on for the chart pattern and it is clear to see the price rejection of the $1695/$1700 price resistance zone.
I like to also use a trendline for extra confluence. I will only take a head and shoulders pattern trade entry if the trendline of the existing trend is broken. This will be a bullish trendline break for head and shoulders patterns and a bearish trendline break for the inverse.
My stop loss was was placed above the resistance zone and left shoulder to keep it out the way of any potential price volatility spikes. So long as the next price high (right shoulder) is made lower than the previous high (head) then the trade set up is valid. Ideally you want the the left and right shoulders to be similar in alignment.
As you can see on the chart above, gold became choppy for a good 24hrs following the entry of the trade retesting the $1678/$1680 right shoulder level multiple times before the sell off began. From there price resided below the 1hr 50 EMA and used that as dynamic daily price resistance.
Today saw a heavy sell off on the global markets including Gold and this saw the final profit target reached and price even went further and hit the next daily price support zone at $1580. Short positions on Spot Gold (XAUUSD) benefit from positive swap fees so it would not have been a problem if this trade took longer to reach the target profit. Traders holding short positions receive daily payments from their broker/liquidity provider.
As always, just keep things simple when analysing the financial markets. This trade consisted of 2 main points of analysis, a higher timeframe resistance zone and the head and shoulders chart pattern. All you need to spot these confluences is your common sense and the trendline drawing tool and you can start to find similar trade entries on almost any financial market.
If you want to learn more about different trading chart patterns then check out my Pattern Trading Strategy Guide by clicking on the link below. It is 100% FREE OF CHARGE to download immediately.
If you want to learn how to trade the financial markets the right way then take a look at my Mastering The Markets – Retail Trading Course.
All my technical analysis is done using the TradingView platform. You can get access via the link below.
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DISCLAIMER: None of the information posted on this site is to be considered investment/financial advice. Trading is high risk and you should only trade with money you can afford to lose.