Gold Envelope Trading Strategy – (Performance, Backtest, Setup, Rules)

Gold is one of the most famous commodities in the world and is a great diversifier for those trading mainly stocks. However, its price has gone nowhere in the past decade, so we decided to test some strategies and try to improve its buy-and-hold returns. Today, we are looking at a gold envelope trading strategy, which is a mean reversion strategy.

The gold envelope trading strategy is a mean reversion trading strategy that involves a moving average and upper and lower bands. This type of strategy helps traders identify when an asset is overextended. However, a question arises: is it a profitable strategy to trade in gold?

In this article, we are going to see what an envelope trading strategy is, develop a trading strategy to trade gold, and backtest it to see whether it is profitable or not.

Related reading:

What is an Envelope Trading Strategy?

An envelope trading strategy is a technical analysis approach designed to help traders identify potential buy and sell signals by using a set of upper and lower bands or “envelopes” that are drawn around a price chart. One of the most famous envelope trading indicators is the Bollinger bands.

To develop an envelope trading strategy, traders start by selecting a moving average (usually a simple or exponential moving average) of the asset’s price over a specific time period. The moving average serves as the basis for the envelope bands.

Two sets of bands are then calculated. The upper envelope band is created by adding a certain percentage or fixed amount to the moving average, and the lower envelope band is formed by subtracting the same percentage or amount from the moving average.

When the asset’s price moves beyond the upper envelope band, it may be considered overbought, potentially signaling a sell or short position.

Conversely, when the price falls below the lower envelope band, it may be considered oversold, indicating a buy or long position. However, this is not the only way to interpret the envelope signals.

Now that we know what an envelope trading strategy is, it is time to backtest it in gold.

Gold Envelope Trading Strategy – trading rules

The trading rules are very simple:

THIS SECTION IS FOR MEMBERS ONLY. _________________ Click Here To Get A Trial Access Click Here To Get Access To Trading Rules

And that’s it! Now it is time to backtest the strategy in the real world and see whether or not it is profitable.

Gold Envelope Trading Strategy – backtest

We backtested the strategy since 2000. Here is the equity curve:

Gold envelope trading strategy
Gold envelope trading strategy

The compounded returns look good, in our opinion.

Here are some performance and metrics statistics about the strategy:

  • CAGR was 4.87% (buy and hold 9.04%)
  • Time spent in the market was only 19.84%
  • Risk-adjusted return was 24.54% (CAGR divided by time spent in the market)
  • Maximum drawdown was -26.49% (-44.36%)

As you can see, the strategy generated pretty solid returns for being invested in such a short period of time. The buy signal was triggered 53 times since 2000, and despite being invested only ⅕ of the time, it generated more than half of the returns compared to buy and hold.

Moreover, it suffered a much less severe drawdown. Overall, we believe this has the potential to be used as a stand-alone strategy.

Gold Envelope Trading Strategy – conclusion

To sum up, today we showed you what an envelope trading strategy is and provided an example of how to trade gold using it. The strategy we presented was very profitable and could be improved by adding another confirmation indicator or adjusting some parameters.

Similar Posts