1998issue C071-5
Gold volatility breakout as one written entry and exit procedure
In March and April 1997, COMEX gold showed measurable historical volatility compression, then a downside Volatility breakout. The archive used a Candlestick hammer and peaking range as the exit, not as the start of a longer view.
- The procedure entered only after short-term historical volatility and average true range showed measurable compression against a longer baseline.
- The case treated contraction as directionally uncertain and required readiness to trade either side and to exit a false breakout quickly.
- A Candlestick hammer with short-term peaks in average true range and historical volatility was used as evidence that the expansion might be over.
- A sharp rise in volatility after a low-volatility environment was treated as a reason to exit and wait for the next compression cycle, not to convert the trade into a longer-term view.
Compression that could be measured
On 10 April 1997, four-, six- and 10-day historical volatility readings in COMEX gold were all below 50 percent of the 100-day reading, with the one-day average of those three readings at 32.31 percent, the lowest level of the year.
Historical volatility was defined as the standard deviation of log close-to-close returns over four, six or 10 days divided by the same statistic over 100 days.
The one-day average true range in COMEX gold reached 1.10, described as the lowest level of the year and a very narrow range for that market. A small symmetrical triangle formed in COMEX gold between 26 March and 10 April 1997, coinciding with the compressed volatility readings.
A two-way plan, not a named direction
The case framed the setup as directionally uncertain. A volatility contraction can precede a large move, so the procedure required readiness to trade either direction and to exit quickly on a false breakout.
On 11 April 1997, gold broke out to the downside. Within four days it was trading more than $11.00 lower.
When expansion was treated as over
A Candlestick hammer on 16 April 1997, together with short-term peaks in average true range and historical volatility readings, was used as evidence that the breakout expansion might be over.
The procedure treated a sharp rise in volatility indicators after a low-volatility environment as a reason to exit and wait for the next compression cycle rather than convert a short-term expansion trade into a longer-term view.
All readings on this track · 11 readings
- 1995A tight-range volatility breakout as one classroom procedure
- 1995Constructing range-compression breakout procedures
- 1996Volatility contraction and narrow-range breakout rules
- 1998Gold volatility breakout as one written entry and exit procedure
- 2005Evaluating next-day range expansion breakouts
- 2006Combining BandWidth extremes with a Stochastic oscillator and a Volatility breakout
- 2007Gating currency volatility breakouts with ADX and trailing stops
- 2010Closing half-hour longs after late bear rallies
- 2013Bollinger Bands, volatility breakout, and breakout confirmation as one testable procedure
- 2014Confirming swing breakouts after wide-range cups and gaps
- 2019Extreme-seeking volatility with bands, breakouts, and chandelier exits