Day-Trading Gold ETFs: Top Tips

Gold exchange-traded funds (ETFs) are one of the simplest ways to trade gold. There are gold ETFs with lots of liquidity, and unlike futures, the ETFs don't expire. Gold ETFs also offer diversity: trade the price of gold, or trade an ETF related to gold producers.

Gold, like other assets, moves in long-term trends. Those trends attract large numbers of traders at certain junctures, providing the most favorable day-trading conditions. Here's how to take advantage of this.

Key Takeaways

  • Gold moves in long-term trends, making it attractive to a large number of traders and providing favorable day-trading conditions.
  • For technical analysts, trading gold can make use of several types of gold-tracking securities including ETFs, unit investment trusts, and gold miner stocks.
  • While ETFs track gold's price indirectly via derivatives contracts held by the fund, unit trusts such as GLD and IAU actually buy and hold physical gold.
  • Understanding the price behavior of these different instruments can help identify entry points and exits for short-term trades and confirm trends and reversals.

ETFs vs. Unit Trusts

While the SPDR Gold Trust (GLD) and iShares Gold Trust (IAU) are often called ETFs, they are actually unit trusts. These unit investment trust (UITs) actually own physical gold. On the other hand, an ETF is a fund that will typically invest in products that track gold's price, such as gold futures. ETFs and trusts are both acceptable for day-trading purposes.

GLD and IAU are the most liquid and actively traded gold investment trusts, with 5.5 million and 4.7 million shares, respectively exchanging hands daily, on average. The iShares Gold Trust is about one-fifth the price of the SPDR Gold Trust, and it will therefore have smaller intraday movement in absolute dollar terms, but the lower price means that larger quantities can be traded. The price and volume of the SPDR Gold Trust make it more favorable for day trading.

Popular gold-miner ETFs—funds that buy gold-miner stocks and reflect their performance—are the VanEck Vectors Gold Miners ETF (GDX), with approximately 26.8 million shares in daily volume, and VanEck Vectors Junior Gold Miners Fund (GDXJ) with about 5 million shares traded daily.

When to Day-Trade Gold Trusts and ETFs

Volatility is a day-trader's friend. Frequent price movement, coupled with liquidity, creates greater potential for profits (and losses) in a short time.

Focus on gold ETFs and trusts when the day-to-day price is fluctuating at least 2%. Apply a 14-day average true range (ATR) indicator to a gold daily chart, then divide the current ATR value by the ETF's or trust's current price, and multiply the result by 100. If the number isn't above 2, then the market is not ideal for day-trading gold ETFs or trusts.

The Gold Miner and Junior Gold Miner ETFs are typically more volatile than the gold trusts. When the price of gold is steady, the gold miners may offer slightly more day-trading opportunities due to their greater volatility.

GLD daily ATR

During the uptrend at the right in the figure above, the day-to-day movement is typically less than 2% (ATR reading divided by price), which is common in a trending environment. Remember, day-trading relies on short-term volatility to make for a profitable approach to trading. There will likely be fewer intraday opportunities in this environment and less profit potential than when the ETF is more volatile. This suggests looking elsewhere to find day-trading opportunities within the gold complex.

Day-Trading Gold Miner ETFs and Gold Trusts

When the SPDR Gold Trust is moving more than 2% a day, focus on it. If the trust is moving less than 2%, trade one of the gold-miner ETFs. These are the recommended conditions for day trading, although the gold trusts and ETFs can be traded using the following method even during non-volatile (less than 2% daily movement) times.

Trades are only taken in the trend's direction. The price must have recently made a swing high for an uptrend, and you are looking to enter on a pullback. At some point during the pullback, the price must pause for at least two or three price bars (one- or two-minute chart). A pause is a small consolidation where the price stops making progress to the downside and moves more laterally.

Once the pause has occurred, buy when the price breaks above the pause's high, as we are going to assume that the price will continue to trend higher. The pause must have a higher low than the former swing low. If it doesn't, it's a warning that the uptrend may be in danger, and no trade is taken. After the entry, place a stop-loss order just below the pullback low:

Gold miners

The tactic is the same for a downtrend; the price must have recently made a low dip, and you are looking to enter on a pullback (in this case, the pullback will be to the upside). At some point during the pullback, the price must pause for at least two or three price bars (one- or two-minute chart).

Once the pause has occurred, short-sell when the price breaks below the pause's low, as we are going to assume that the price will continue to trend lower. The pause must have a lower high than the former swing high. If it doesn't, it's a warning that the downtrend may be in danger, and no trade is taken. After the entry, place a stop-loss order just below the pullback low.

Day-Trading Gold Targets and Pitfalls

The strategy attempts to capture trending moves in gold-related ETFs and trusts. This should ideally be done when there is adequate market volatility. Otherwise, the trends are more likely to run out of steam and not reach our profit target.

The profit target is based on a multiple of your risk. When daily volatility is near 2%, aim for a profit target two times your risk. When volatility approaches 4% and there is a strong trend intraday and on the daily chart, aim for a profit target that is three or possibly even four times your risk.

In the figure above demonstrating gold day-trading strategy, a long trade is taken at $33.20/22, and a stop is placed just below the pullback lows at 33.13/15, resulting in a risk of about 7 cents per share. Therefore, a profit target is placed 14 cents (2 x 7 cents) above the entry price, giving a target of $33.36. During more volatile conditions, the target could be extended to 21 or 28 cents above the entry price (three or four times risk, respectively).

The strategy is not without pitfalls. One of the main issues is that the pause within the pullback can be quite large, making the stop and risk quite large. There may also be multiple pauses within a pullback; choosing which one to trade can be rather subjective. If there is no pause—just a sharp pullback and sharp move back in the trending direction—the strategy will leave you without a trade.

The profit target is fixed at a multiple of risk in order to compensate traders for taking that risk. The price may show signs of a reversal, though, before the target is reached. 

An optional step is to move the stop to just below new lows as they form during an uptrend, or move the stop down to just above new highs as they form during a downtrend. The stop is moving with the trend—acting as a trailing stop—and serves to lock in some of the gains or reduce the loss if the trend reverses.

What Are the Most Popular Gold ETFs to Trade?

For gold itself, the SPDR Gold Trust (GLD) and iShares Gold Trust (IAU) are the largest and most liquid unit trusts (meaning they actually hold gold for the fund). Beyond straight gold, investors can also explore gold mining ETFs such as VanEck Vectors Gold Miners ETF (GDX) and VanEck Vectors Junior Gold Miners Fund (GDXJ).

How Much Should I Risk on a Day Trade on a Gold ETF?

A good rule of thumb is to aim for at least twice the amount of risk you are willing to take; that is, the distance from the entry point to the stop-loss level. If market conditions are exceptionally volatile and you got in at a good point in the trend, you could consider a profit target of three or four times the amount you are risking. Better yet, use a trailing stop loss with a distance the same as your original stop-loss order.

What Do I Do If the Daily Volatility Is Below the Suggested 2.0% Threshold?

For a day trader in gold, it's the hardest answer of all: do nothing. Alternatively, you could look at gold miner ETFs, as they will tend to have greater volatility than plain gold on a given day.

How Can I Recognize a Pause in a Pullback During an Uptrend or a Bounce in a Downtrend?

The pullback or bounce should not exceed the most recent swing lows or highs, respectively. If those levels hold, then wait for one or two more minute bars to confirm the pause. If such a pause does develop, then enter in the direction of the trend, establishing both a stop-loss order and a take-profit objective for your protection.

The Bottom Line

Gold isn't always popular, so when the price of gold is barely moving, day traders should leave gold ETFs and trusts alone. When volatility increases, though, day trading is warranted. Focus on trading with the trend. Wait for a pullback and a pause in price. The pause is what provides the trigger to enter the trade. When the price breaks out of the pause/consolidation back in the trending direction, take the trade. Place a stop just outside the pause in price. Your target should compensate you for the risk you are taking; therefore, set a target of two times your risk—or potentially more in volatile conditions.

Article Sources
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  5. Yahoo! Finance. "VanEck Gold Miners ETF (GDX)."

  6. Yahoo! Finance. "VanEck Junior Gold Miners ETF (GDXJ)."

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