Technical Analysis: Basic Concepts Every Trader Must Know- Part 3
I’ve been discussing basic, yet very important technical analysis concepts in recent articles. A few weeks ago I covered the importance of identifying trends, as well as support and resistance levels.
If you haven’t read those articles, I suggest you go back and do so before you continue. You’ll need to understand those important concepts in order to fully grasp the idea behind today’s subject.
Remember, here at Commodity Trading Research, we’re staunch believers in avoiding the complications and risks of commodity futures contracts. Instead, we focus on the simplicity and efficiency of commodity ETFs.
Of course, we still keep a very close eye on commodity futures as these contracts dictate the price of the ETF.
But for ease of trading, there’s nothing better than commodity ETFs.
With that out of the way, let’s get to the next basic technical analysis concept every trader must know…
Breakouts
Breakouts occur when the price of a commodity rises above an established trend line or resistance level. Identifying a potential breakout is important because it offers substantial profit opportunity if traded correctly.
You see, once a trend line or resistance level is broken, it creates a rush of short covering and/or buying pressure, which causes prices to rise quickly.
Let me show you what I mean…
As you can see, silver was stuck in a firm downtrend (red line) from late April through early August. Remember, when commodities are stuck in a downtrend, it’s important to either stick to the sidelines or sell the commodity short.
But when the price reverses up, breaking the downtrend line, it creates a bullish trading opportunity…
Notice above, on August 8th silver quickly broke above the red downtrend line thanks to bullish Chinese economic data. By trading, and more importantly, closing the day above our important resistance line, silver experienced a technical breakout.
As you can see, it didn’t take long for the commodity to rise from $20 to the current price of $23… a remarkable 15% surge in just a few trading days. Investors who had a close eye on silver should have raked in enormous gains thanks to the sudden surge in price and volatility.
As a matter of fact, subscribers to my commodity ETF option service, the Commodity Profit Hunter, just realized gains of 222% thanks to the same technical breakout I discussed above.
To get such an enormous short-term gain, we used a specially chosen call option play in a commodity ETF that tracks the spot price of silver.
Now let me be clear…
Trading breakouts isn’t always this simple. In many cases, a commodity will break above resistance only to fall back below it in following days. Such a situation is known as a failed breakout.
How do you know a real breakout vs. a failed breakout?
There a few rules of thumb that can help you steer clear of failed breakouts. I’ll get to those in another article. But just remember, even those rules aren’t foolproof.
It all comes down to this…
When trading breakouts you simply have to be open to taking a calculated risk. Sometimes the trade will work and many times it won’t. But when a breakout does work, investors can rake in substantial profits in a very short period of time.
Stay tuned to Commodity Trading Research for additional technical analysis tips.
Until Next Time,
Justin Bennett
*** Editor’s Note*** If you’d like to discover how to make quick commodity ETF profits, with controlled risk, I suggest you take a closer look at the Commodity Profit Hunter . You can find it here.
Category: Technical Analysis
