The Breakaway Candlestick Pattern is a technical analysis tool used by traders in the foreign exchange (forex) market to identify potential price reversals. It was first introduced by Japanese candlestick charting pioneer, Steve Nison, in his book “Japanese Candlestick Charting Techniques.”
What is the Breakaway Candlestick Pattern?
The Breakaway Candlestick Pattern is characterized by a long white or black candlestick that breaks out of a narrow trading range or consolidation period. It is typically seen as a bullish or bearish reversal signal, depending on the direction of the breakout.
It is typically used to confirm the strength of a trend and identify potential entry and exit points for trades.
- It indicates a change in market sentiment, the Breakaway Candlestick Pattern signals that the market is shifting from a state of indecision to one of conviction. This can be a bullish or bearish signal, depending on the direction of the breakout.
- It can confirm the strength of a trend, if the Breakaway Candlestick Pattern occurs during an uptrend, it can confirm the strength of the trend and indicate that the trend is likely to continue. Similarly, if it occurs during a downtrend, it can indicate that the trend is likely to reverse.
- It can identify potential entry and exit points, the Breakaway Candlestick Pattern can provide traders with an opportunity to enter or exit a position at a potentially favorable price.
Breakaway Strategy
Bullish Breakaway Candlestick Pattern
- A long white candlestick that breaks out of a narrow trading range or consolidation period.
- A high volume of trading activity during the period of the Breakaway Candlestick Pattern.
- A strong bullish momentum, indicated by a sharp increase in price after the breakout.
Bearish Breakaway Candlestick Pattern
- A Breakaway Candlestick Pattern is a long black candlestick that breaks out of a narrow trading range or consolidation period, with high volume of trading activity.
- The pattern is characterized by a strong bearish momentum, indicated by a sharp decline in price after the breakout.
Breakaway Candlestick Pattern Pros & Cons
Pros
- It can provide clear entry and exit signals.
- It can confirm the strength of a trend.
- It can indicate a change in market sentiment.
Cons
- Using the pattern as a primary indicator is not suitable specially when you are new to the market.
- Identifying the pattern based on its characters consumes time thus it is not suitable for scalp traders.
Conclusion
The Breakaway Candlestick Pattern is both a bullish/bearish reversal candlestick pattern that appears after a downtrend or an uptrend. It is made up of three candlesticks: a long black candlestick, followed by a gap down or gap up on the next trading day, and then a white candlestick that fills the gap.
The long black candlestick has a long upper shadow and a small lower shadow, indicating that buyers tried to push the price higher or the seller tried to pull the price lower but were unsuccessful. The gap down on the next trading day shows that the bears/bulls are still in control, while the white candlestick with a small upper shadow indicates that the bulls/bears have taken control and are pushing the price higher or pulling down lower.
This pattern can be a useful tool for identifying potential price reversals, but it is important to remember that it is not foolproof and should be used in conjunction with other technical indicators, it sometimes give false trend that could possibly liquidate your open trades, always remember to set you risk management plan and put stop loss whener you place a trade in the market.
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