Breakout in gold trading

A breakout occurs when price moves decisively beyond a level that has previously held: a range high, a resistance zone, a trendline or a consolidation. Breakout traders enter in the direction of the break, expecting momentum to carry price toward the next level. Range traders do the opposite, fading breaks they expect to fail. Who is right depends on the context and the session.

How it applies to gold trading

Gold breaks out frequently and falsely. The London open often breaks the Asian range, and the New York open often breaks the London range, but a large share of those breaks reverse within the hour. Traders therefore look for confirmation: a close beyond the level on the trading timeframe, expanding range (ATR), a retest that holds, or alignment with the session that typically drives the move. A buy stop a few cents above the level, with no confirmation, is the entry that gets swept most often.

Breakouts on gold also need wide stops because the retest can travel back into the range before the move resumes. That wide stop is paid for with smaller size, not with a tighter stop.

Our breakout-and-retest lesson sets out one complete rule set, including the confirmation filters, the stop placement relative to the range and the sessions in which the setup is taken.

A common mistake

Treating every touch of a level as a breakout. On gold a wick through a level is normal; a close beyond it with follow-through is the actual break.

See also: Retest, Fakeout, Stop order, Consolidation and range.

Frequently asked questions