Today in our article we are going to discuss a bit about looking for breakouts. In doing so we are going to look at the daily chart of gold. Any time we see the price consolidate, we need to look for the opportunity to trade the price breaking out of the range. Price breakouts are a common way to look for entries into a trade and used by many traders. Because of this, it seems to make them even more likely to work.

Take a look at the daily chart of gold:

In this example, we have drawn four lines. There are two that are drawn above the consolidation and two that are drawn below it. The upper lines will act as resistance, while the lower lines will act as support. As the price moves between these lines, they will become range bound and become more likely to want to break out.

Breakouts can occur either to the up side or the down side after the consolidation happens. In the chart above, you can see the first one where the price broke to the down side after it had consolidated. In the second example, you can see that it is still in the consolidation phase and has not broken out yet.

As we look at price action on the charts, you will oftentimes see various patterns of consolidation. These types of price patterns can be seen as both continuation and reversal types. This means that if we can identify the trend the price is moving in, we can get a better idea of the direction of the breakout. For example, if we see a reversal pattern, such as a double top, we can look for the breakout to move to the down side. If we see a continuation pattern, such as a flag or wedge, we can look for the breakout to move in the direction of the trend.

Regardless of the type of pattern, the important thing is to know that they generally have an area of support and resistance that form the pattern. As you draw lines on the chart, showing support and resistance, you will begin to see the consolidation outlined. In order to take a trade when the consolidation is found, we would look to enter into the trade on a break above or below the support and resistance lines.

These entry orders are going to buy stops and sell stops, so we can enter the trade once the price has broken out of the consolidation pattern. This is a way to enter the trade that will only get you in once the price action has confirm the breakout. After the entry has occurred, you would want to place a stop loss back within the consolidation, in case the price reverses. Keeping your risk at an acceptable level will allow you to take these types of trades without risking too much.

Take some time to review these breakout trades to see if they can help you identify better trading opportunities.