If you are a gold futures trader, perhaps you took advantage of the recent breakout trade opportunity created by the symmetrical triangle price created that began in January 2009. Gold gave us one of the best examples of how to anticipate a range breakout trade and play for a precise price target using simple pattern analysis. Let’s take a look inside this example and brush up on classic technical concepts.

Click on image to enlarge!

I’m showing the mini-gold futures contract, daily chart beginning in January 2009. For the moving averages, I am showing the 20 day exponential moving average (green) and 50 day exponential moving average (blue) as reference points.

Price began 2009 with a $200 point swing into the February highs. Price then retraced slightly over $100 of that move into the April lows, and then rallied back to the $975 level as traders held their breath in eager anticipation of an eventual breakout above the critical $1,000 overhead resistance level.

Price then formed a classic technical chart pattern known as the “Symmetrical Triangle,” wherein price swing highs were forming at lower peaks and price swing lows were forming at higher troughs (or lows). The easiest way to identify these patterns is to draw simple trendlines and connect as many price points as possible. By July, it became evident that a triangle consolidation was forming.

According to classic technical analysis, when one observes a symmetrical triangle, or a price consolidation pattern, he or she would then be looking to play an eventual breakout of the established trading range. It is often best to take a neutral view on volatility, instead of trying to guess the direction of the price breakout.

According to the “Range Alternation” Price Principle, price alternates between periods of range expansion and range contraction, and so after a period of price contraction, we could therefore expect the next move to be a range expansion phase that often breaks out in the direction of the prevailing or previous trend.

According to the “Range Alternation” Price Principle, price alternates between periods of range expansion and range contraction, and so after a period of price contraction, we could therefore expect the next move to be a range expansion phase that often breaks out in the direction of the prevailing or previous trend.

Another clue that price was in a tight consolidation phase was the orientation of the 20 and 50 period EMAs - when a short-term and intermediate term moving average ‘flattens’ or converges for a period of time, this is a signal that price structure has entered a consolidation phase. More advanced traders could use the Average Directional Index, or ADX, to highlight the compression in price that was occurring.

Traders were on ‘stand-by’ mode in eager anticipation of a range breakout, and ready to take advantage of any break of the upper trendline and particularly a break of the key resistance at $1,000 per ounce. Traders would have placed a stop under the lower trendline once a breakout occurred.

Price tightened into the latter stages of the triangle through August and then broke strongly with a powerful range expansion bar (day) on September 2nd, breaking solidly and closing above the upper trendline. September 3rd confirmed this price breakout by closing two days in a row above the upper trendline of the pattern. This was a buy signal for conservative traders who were eager to avoid a whipsaw (when price forms a false breakout and then falls back inside the pattern... or worse, breaks outside the opposite boundary).

Breakout trading strategies can be difficult because traders have most likely been lulled into a sense of complacency as a result of the prior months being in a tight, low-volatility environment. It is often difficult to hold on for big wins as the market moves into a range expansion or momentum breakout mode because traders are fearful that price could peak and reverse lower at any moment.

Classic technical analysis teaches us that one simple method to anticipate a price projection target from a Symmetrical Triangle is to take the height of the triangle (which is the difference between where the upper and lower trendlines of the patterns at the start of the pattern) and then add this distance in price to the breakout price to give a possible price projection target.

In the case of gold futures, the triangle began on January 15th, 2009 just above $800 per ounce ($813) and spanned to a price high just above $1,000 per ounce ($1,012) on February 20th. This gave us a height for the pattern, which was recognized later in the year, of $200.

As we anticipated the breakout, we could not place an upside target. We had to wait for the breakout and then take the trade shortly after the breakout occurred and was confirmed, which occurred in early September as price broke the upper trendline at $975 per ounce.

We then add the height of the triangle to the breakout price to give us the formula $200 + $975 = $1,175 which was our initial price target to play for, with perhaps a trailing stop strategy to trail under the rising 50 period EMA to protect profits.

It was generally expected that gold would rally sharply on any break of the key resistance level of $1,000 per ounce, and that was exactly the outcome. Price rallied in two symmetrical bursts in September and October, allowing traders who employ retracement strategies to buy as price pulled back to the 20 or 50 period EMA at the $1,000 and $1,040 level during a pullback into support.

Price then accelerated, forming a price arc, that carried price almost straight up in November from $1,050 to $1,200 with three minimal down-days (not counting the Dubai World debacle).

Traders using this price projection strategy exited their positions with up to a $200 per ounce profit as price entered the target zone of $1,175 which occurred just prior to the Thanksgiving “Dubai World” sell-off. Price overshot the target, peaking just above $1,225 on December 3rd though price has since collapsed down to the $1,100 level again.

Take a moment to study the price chart for additional insights into strategies for anticipating and then trading symmetrical triangle or price breakouts. This type of logic is applicable across all markets and all timeframes, as it is based on classic price principles that have withstood the test of time.

For more articles from Corey, visit Afraid to Trade