• Category: Strategies

How to Trade Bullish and Bearish Breakaway Patterns

Breakaway patterns are an indication of an acceleration of the prevailing trend. Here you will learn about two variations of this pattern—the bullish and bearish breakaway patterns and ways to use them in binary options trading.

How to Trade Bullish and Bearish Breakaway Patterns 

A breakaway is a rare formation and may not be very reliable. These patterns form during significant market flactuations, for example when a sigificant event takes place and affects a company's stock.

How the Breakaway Patterns Form

Both patterns are characterized by a long candlestick, which appears when the buyers or the sellers are particularly strong at the end of a trend. The next day, the bulls and the bears continue to create a gap in the price and in the two days that follow, the bulls and the bears keep the trend in the same direction. On the last day, the trend takes the opposite direction in opposition to the prevailing trend. In essence, on the last day, there is a complete trend reversal.


How to Identify a Bullish Breakaway Pattern

A bullish breakaway is a reversal pattern with modern reliability. This pattern is identified as such:

·       On the first day, the candle is long and red and it is an indication that the prevailing downtrend is continuing.

·       On the second, third and fourth days, the trend continues in the same direction. However, the trend is noticeably weak at this point.

·       On the fifth day, the candlestick is long and blue and tends to close into the body of the candlestick formed on the first and second days.

Those first few candles are an indication of an accelerating trend, which becomes weaker by the fourth candle. The fifth and last candlestick offers a confirmation of a bullish breakaway pattern. When the bullish pattern forms, it is an indication that the market is reversing to take a different direction.

Traders usually await the last fifth candle as confirmation of a bullish breakaway pattern. However, most of the time, two or even all five candles could be relaying the signal that the bearish trend is weakening and the bulls are taking over the market.

How to Identify a Bearish Breakaway Pattern

The bearish breakaway pattern is also a reversal pattern of moderate reliability. This pattern is identified as such:

·       The first candle is a continuation of an uptrend. It is long and bullish.

·       The second candle is equally bullish and breaks upward from the first candlestick.

·       The third and fourth candlesticks reflect close prices that are higher, with a bullish fourth candlestick.

·       The fifth and last candlestick is a long and bearish candle with a close price indicated by the gap between candlestick one and two.

Trading a Breakaway Pattern

To trade the bullish or bearish breakaway pattern, you want to leverage the initial movement in prices, which is typically strong.  One binary trading option is to trade the high/low contract with a short or average expiration period. Alternatively, you could trade touch options, which have a higher payout. The high/low option allows you to trade the whole trend using a longer expiration period.

Remember that you need to use technical indicators alongside candlestick patterns to determine whether the market can attain the target price.

In summary, breakaway gaps like the ones that characterize the bullish and bearish breakaway patterns are reliable indications of an upcoming new trend. As a binary options broker, it is important to recognize when a change in trend occurs so you can make effective trading decisions.

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