The Comex gold futures contract provides numerous potential trading opportunities. With good liquidity and volatility, the potential for profit is there, as is an equal potential for loss.
Gold usually reacts to movement in key outside markets such as crude oil, stocks and currency markets. In addition, gold futures may see some volatility during and after key economic data announcements such as non-farm payrolls data and inflation data such as PMI (prime mortgage insurance).
Here is a very simple strategy for trading breakouts in gold around key economic announcements:
- Place a buy stop order $6.00 above the current gold price
- Place a sell stop order $6.00 below the current gold price.
- Watch as the market reacts to the data release.
- If filled on the buy stop, immediately place a sell stop order to sell your position $4.00 below your buy price.
- If filled on the sell stop, immediately place a buy stop to cover your sell $4.00 above your sale price.
- If the gold market moves + or – $6.00 from your entry price, move your stop to break-even.
- Manage your trade.
When using this breakout strategy, keep these key points in mind:
- Gold tends to move in $6.00 increments. Why this is, nobody can really tell you.
- The market cold whipsaw you. It is entirely possible that your buy stop cold get filled, the market immediately reveres course before you can react, and your sell stop is triggered stopping you out of your position. Of course, the reverse could also occur if your sell stop is triggered followed by your buy stop. While this may seem unlikely, futures trading is an extremely risky business.
- Past performance is not necessarily indicative of future results. An investor can lose more than his or her initial investment.
- You have to act fast when placing stops if your buy or sell stop is triggered. This is not the time to take a bathroom break.
- You will get stopped out a lot. Like any breakout strategy, you will get topped out with losses often and may be whipsawed. On the flip side, you will also have the potential to catch some monster moves. For example, catching one $20 winner can potentially wipe out five $4.00 losers.
Futures trading involves substantial risk and is not suitable for all investors. Please make sure it is appropriate for you in light of your financial circumstances, trading experience and risk tolerance.
