How to Trade Gold’s Breakout
Gold is making a comeback this month, driven by expectations of lower interest rates, geopolitical concerns, and doubts about overvalued stock markets. In just six days, it has surged to a new record high, adding over $110 to its price – breaking above key levels of resistance.
The Breakout
Gold’s historic breakout is best viewed on the weekly candle chart (below).
Having failed to break and hold above the 2020 highs on multiple occasions during the last four years, Gold bugs finally managed to push prices above resistance. Last week’s price action saw the market make a sustained climb higher – closing on highs for the week.
The strong close on the weekly candle chart, combined with the preceding base of consolidation are two key factors which tip the probabilities in favour of gold’s breakout holding.
Gold Weekly Candle Chart
Past performance is not a reliable indicator of future results
How to Trade It
Traders typically have two options when trading breakouts, the first is to buy on the initial break of resistance and risk being caught in a fakeout (failed breakout), the second approach involves being patient enough to buy the first pullback.
The key benefit of the second approach is it reduces the probability of being caught on the wrong side of a fakeout.
Currently, the gold price is above the upper Keltner Channel and the RSI is above 80 – this indicates that we could be due for a pullback.
How deep the pullback will be is question we cannot answer, but we can draw a zone from which a pullback would be attractive. This zone starts at the volume weighted average price (VWAP) anchored to inception of the breakout (purple line on daily candle chart below). The ‘buy zone’ ends at broken resistance – an area which must hold for the breakout to be maintained.
Traders can look for short-term reversal patterns, such as hammer candles, double bottom’s, and bullish engulfing candles to form within the targeted buy zone. Should one of these reversal ‘trigger’ patterns occur, a trader looking to buy the breakout could initiate a long position with a stop below the reversal pattern lows.
Using pullbacks and trigger patterns on lower timeframes in conjunction with higher timeframe breakouts is an interesting approach to crafting potentially insightful trade setups.
Gold Daily Candle Chart
Past performance is not a reliable indicator of future results
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 84.01% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
The Breakout
Gold’s historic breakout is best viewed on the weekly candle chart (below).
Having failed to break and hold above the 2020 highs on multiple occasions during the last four years, Gold bugs finally managed to push prices above resistance. Last week’s price action saw the market make a sustained climb higher – closing on highs for the week.
The strong close on the weekly candle chart, combined with the preceding base of consolidation are two key factors which tip the probabilities in favour of gold’s breakout holding.
Gold Weekly Candle Chart
Past performance is not a reliable indicator of future results
How to Trade It
Traders typically have two options when trading breakouts, the first is to buy on the initial break of resistance and risk being caught in a fakeout (failed breakout), the second approach involves being patient enough to buy the first pullback.
The key benefit of the second approach is it reduces the probability of being caught on the wrong side of a fakeout.
Currently, the gold price is above the upper Keltner Channel and the RSI is above 80 – this indicates that we could be due for a pullback.
How deep the pullback will be is question we cannot answer, but we can draw a zone from which a pullback would be attractive. This zone starts at the volume weighted average price (VWAP) anchored to inception of the breakout (purple line on daily candle chart below). The ‘buy zone’ ends at broken resistance – an area which must hold for the breakout to be maintained.
Traders can look for short-term reversal patterns, such as hammer candles, double bottom’s, and bullish engulfing candles to form within the targeted buy zone. Should one of these reversal ‘trigger’ patterns occur, a trader looking to buy the breakout could initiate a long position with a stop below the reversal pattern lows.
Using pullbacks and trigger patterns on lower timeframes in conjunction with higher timeframe breakouts is an interesting approach to crafting potentially insightful trade setups.
Gold Daily Candle Chart
Past performance is not a reliable indicator of future results
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 84.01% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
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