CHAPTER 3

Reactions to Range Breakout

Usually when there has been a breakout from a range on good volume and with follow-through for two or three days, some amount of consolidation will take place. This consolidation or correction is what I mean by a reaction.

For purposes of clarity, a reaction in a downtrending market is an upward, or even a sideways movement of prices. In an uptrending market, a reaction is a downward, or even a sideways movement of prices.

Swiogs. Defined

A swing looks iike this , or this \/. The legs of a swing look like \, or /, but are usually not of equal length.

What Im looking for here is a reaction that constitutes either a .382 or .618 retracement of the latest leg of a swing. At or between these two points there wiil almost certainly be some sort of resistance.

Resistance Retracenents for narket suing 4855 to 4688 : .382 = 4747 (dotted) GOLD-100DZ

= 4768 (solid) .618 R = 4783 (dasld)

5432

5330

5229 5127 5026 4925

4823

4722 4626 4528

Figure 17 i can see that the leg of the swing from 6-16 to 6-29 covered a range of prices from a high of 4855 down to a low of 4680. The formulas in a downtrending market for my calculations are as follows;

.382 Retracement = + (A-B).382 and, .618 Retracement = + (A-B).618 where;

A = high of the Swing and B = iow of the Swing.

Substituting into the formula, I have:

4680 + (4855 - 4680) .382 = 4747 4680 + (4855 - 4680) .618 = 4788

Note; In an uptrending market the formulas would be;

.382 Retracement = A - {A-B).382 and, .618 Retracement = A - (A-B).618

My Trailing Stops For Breakouts

Now I have a choice to make. I can set my trailing stop one or two ticks above either of these prices. Its a matter of preference and that choice is based on my level of tolerance for getting stopped out. I choose to place my stop at 4748 (one tick above 4747). I got my order filled at 46 6. If I get stopped out, I can always get back in later on.

Adding to My Position after Breakouts There are two ways that I wouid consider adding to my position:

1. I can sell Gold at 4747 if it holds at the .382 retracement and then starts back

down.

2. If I get stopped out at 4748, I can sell Gold at 4788 if it holds at the .618 retracement and then starts back down.

Closing Out My Last Position

Of course I will close out my position immediately if it reaches my objective. That way I wili not have to rely on my protective stop to take me out of the trade. In the case of this trade, I am stopped out of the trade at my objective of 4608 for a profit. I am then looking to possibly get in again on a retracement to one of the Fibonacci points explained above.