On Friday, September 3rd 2021 I wrote a report on gold saying that the price was moving inside a range and said that I expected to see a volatility increase and thus a breakout from the range. Such volatility explosions are quite usual in gold. Sometimes they have a fundamental or macroeconomic trigger while on other occasions the price breaks out without a news event. On this Friday the trigger was the NFP release for August. While I don’t believe it makes sense to take a strong view (lots of risk) on the markets before big risk events such as NFP, a trade with proper risk management and a technical approach can sometimes provide an edge.
This article shows you how to anticipate range breakouts in gold but the approach can be in other markets too. It has been typical for gold to go through phases where volatility first peaks up and then starts to die down. These low volatility periods are obviously followed by breakouts in either direction. If we can identify a method that helps us to enter trades before the breakout happens, then the other breakout traders will carry our trades as they start to buy or sell.
To identify potential breakouts we use a triple moving average system. This helps us to identify those periods when the momentum starts to develop and allows us to get into the trades before the breakouts happen.
To get started, let’s first define a range.
The price range is typically formed after a strong directional price movement. When the momentum created by buyers (or sellers) starts to fade, the market begins to move sideways. This is what is known as a trading range.
We know that these low volatility price ranges will be followed by a burst of volatility either to the upside or to the downside. Traders who understand this can position themselves in advance and have an edge over those that wait for the breakout to happen.
Once the price has been moving sideways for 2 or 3 days we go down to the 30-minute time frame and apply 3 moving averages see the chart: 7, 15 and 30. I strongly recommend that you will also experiment with other moving average lengths and study historical prices to see how this idea works.
Typically in a price range, the market will fluctuate on both sides of the moving averages. This means that the averages usually aren’t aligned while inside a range. However, when the market is getting ready to break out the moving averages can indicate this by getting aligned with the faster averages above the slowest.
Often most of the price action stays either above or below the set of three moving averages too, depending on whether the market is ready to break out to the upside or to the downside. This is when we might want to consider engaging the market.
Here the triple moving average method alerted traders to a potential upside breakout in gold before the employment numbers were released. Let’s break the example down to understand what actually happened.
The moving averages were aligned before the employment data was published. This means that the fastest moving average SMA(7) was above the SMA(15) and both of these moving averages were above the SMA(30). This is a bullish alignment in the SMAs. The fact that the market was Finding support from the SMA(30) was another indication that the market could break to the upside.
In August, there was a similar price range that preceded a strong move higher in gold. What preceded this sideways move was a strong rally higher. Then gold started to move sideways as some traders started to take profits off the table. This sideways move was then resolved with the market breaking to the upside.
While no price range is exactly the same, there are certain similarities between them. On August 23rd the price of gold rallied above the 30-period moving average and the faster moving averages followed, creating a bullish alignment. Not long after, the market broke above the 1788.40 resistance and the conventional breakout traders carried the market forward fuelling the move with their buying.
In this example on June 29th 2021, the trading range was resolved to the downside. It is notable, how the moving averages again are aligned before the market breaks out from the trading range. This time the alignment is bearish with the SMA(7) now below the SMA(15) while the SMA(15) is below the SMA(30). The market rallies once but creates a lower high near the SMA(30). This leads to a further price decline in gold and it doesn’t take long for the market to break out from the range after this. Again, the traders had an opportunity to position themselves for the breakout before it actually happened.
Step 1) Identify the support and resistance levels.
Step 2) Wait for the moving averages to get into either bearish or bullish alignment
Step 3) Buy when the moving averages are bullish or sell when they are bearish
Don’t forget to set a stop-loss order and keep your trade size reasonable. You will need the stops for those occasions when the market doesn’t breakout but continues to fluctuate within the range.
If you want to learn risk management techniques and a highly effective trade entry method you can apply when trading similar breakouts in the future, you are also most welcome to join my free educational webinars at TIOmarkets.com/webinars where you can ask any trading questions you might have.
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Chief Market Analyst
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