Trading the Next Breakout in Gold

Article Summary: Trading breakouts is an excellent strategy for entering into an existing trend. Learn to trade the next break in the gold market.

Gold (XAU/USD) is an attractive speculative instrument for trend traders. Over the course of the 2013 trading year, gold has had one of its largest yearly declines moving as much as $375 an ounce lower. While this strong trend has been enticing, it can be difficult to know when and where to enter into the market. Today we will focus on trading the next move in gold using a breakout for entry.

Learn Forex –Gold Daily Chart

(Created using FXCM’s Marketscope 2.0 charts)

The first step in trading a breakout is to find existing levels of support and resistance. Normally this can be done by connecting either a series of highs or lows through the use of a trendline. Below we can see a consolidating triangle forming on gold which has been formed through a descending line of resistance converging with an ascending line of support near $1,350. Once the points are then found on the graph a trader can prepare for a breakout.

A breakout occurs when price moves through either the outlined levels of support and resistance. Since gold is in an extended downtrend, it makes an excellent case for selling new breakouts in the direction of the trend. To do this, entry orders can be set below support and the previous low. When price breaks through this point our entries will trigger initiating a new sell position. Risk management should always be a concern, with stops being set over our extrapolated line of resistance. With this in mind, let’s review the complete trade setup for a breakout in gold.

Learn Forex –Gold Daily Consolidation

(Created using FXCM’s Marketscope 2.0 charts)

My preference is to sell Gold on a break towards lower lows in the direction of the primary trend. Sell entries can be considered under trenline support and the previous low at $1,338.06. Stops can be placed over the declining line of resistance near 1,395 or better. First profit targets should be at $1225.00 or better to create a minimum 1:2 Risk/Reward Ratio.

Alternative scenarios include gold breaking out over resistance. In the event price breaks to higher highs, our entry order to sell can be deleted.

—Written by Walker England, Trading Instructor

To contact Walker, emailwengland@fxcm.com. Follow me on Twitter at @WEnglandFX.

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Trading the Next Breakout in Gold