All that glitters…
Gold to Breakout Out of Long-term Trend?Looking at the daily gold chart below, it looks like the metal is in a classic triangle that started over a year ago in July 2016.
Technical analysis theory suggests that if the metal breaks higher then expect a new decisive trend higher (and vice versa).
Decisive Breakout Due?
When to Trade?This is a daily chart and, as of 31 July 2017, the metal isn’t close to the Support or Resistance yet. There’s no need to rush into a trade.
You’d often trade once the new trend has been confirmed, i.e. once the price has closed for 3 sessions above the Resistance trend line or closed for 3 sessions below the Support trend line.
Where to Place Your Stop?The theory suggests setting your stop loss “a little” inside the triangle.
If there is a break higher then the Resistance trend line to acts as a Support trend line.
At the same time though, expect this new Support to be tested, i.e. don’t put your stop on, or too close, to the trend line, or you’re more likely to get stopped out.
Where to Place Your Limit?The same height as the height of the triangle when there is a break out.
If gold breaks at $1,280 and the height of triangle is $60 at that point, then set your Take Profit order (aka Limit order) at $1,280 + $60 = $1,340.
With gold you trade per $0.1 that the gold price moves. This would be a handy $60 (600 point) move.
Patience is needed though and you may need to keep the trade open for a few weeks (so expect so pay some rolling fees).
Tea LeavesYour upside might be 600 points but your downside may only be 100-200 points (once the new trend is set in)…
That sounds like a good risk-reward ratio but charting can be a bit like reading the tea leaves and seeing what you want to see.
Keep any trades really small (or just don’t trade).
What if the Gold Price Breaks Below the Triangle?With a triangle, the theory works for both upwards and downwards breaks of the triangle.
If the precious metal breaks lower, then there could be a decisive move lower.
Also see how to spread bet on gold.
3 August 2017 Update: Hedge Funds Getting Longer of GoldThere’s little change in the gold chart from 31 July (above).
The metal is still firmly in a triangle formation, and as discussed above, we are waiting for a break. There’s no trade for us yet.
Adding a little colour though, we’ve had another look at the hedge funds trades (they had done little with the metal for the last couple of weeks).
However, the latest Commitment of Traders (COT) report shows that “Non-Commercial” trades, i.e. big speculative trades by hedge funds, are getting longer of the metal.
The long:short ratio on gold increased from 1.4:1 to 1.7:1.
This still isn’t telling but after being stuck at 1.4:1 for a few weeks, if we see a further increase in the long:short ratio that means more pressure on the precious metal to break higher.
At the same time, the US dollar index is in a medium-term down trend. That will also support gold prices.
The chart below is a daily chart, so I won’t be trading yet. Still waiting for a confirmed break.
Decisive Breakout Due?
Commitment of Traders note – the COT reports on Financial Spreads are some of the easier ones to read.
9 August 2017: Long-Term Gold Triangle PatternWe’ve added an update on the gold market here.
17 August 2017: Gold Breaks Creates Trading OpportunityThe triangle pattern has been broken.
We’ve added a gold spread bet set-up here.
12 September 2017: Gold Pattern Gives 464 Point ProfitYes, this worked so well I can hardly believe it.
It’s the kind of trade that makes you think spread betting is easy.
Be careful, spread betting is high risk and has a habit of teaching you lessons like a cruel master. It lulls you into a false sense of security.
I’m expecting to get a proper slap soon.
For now though, we’ll take the 464 point profit.
For a full update see textbook gold spread bet.
Remember: Spread betting, CFDs and forex trading carry a high level of risk. You can lose more than your initial investment. These products are not suitable for all investors. Only speculate with money that you can afford to lose. Make sure you fully understand the risks involved and seek independent financial advice where necessary.