A breakaway gap is a term used in technical analysis which identifies the first phase of a security price reversal. A breakaway gap is signified by a reversal trend gap in the movement of a stock price. Breakaway gaps are usually supported by levels of high volume.
A breakaway gap is the first phase of a security price’s reversal. It can signify a price trend higher or lower. Throughout a trend reversal, investors can expect to see a breakaway gap followed by several runaway gaps and an exhaustion gap in the final phase.
Gaps can be a common occurrence in security price charts. A gap occurs when candlestick pattern see significant gaps in their prices from one day to the next. Gaps are common in morning trading when price sentiment may change overnight. They are also common when a security’s price is reversing.
Following the trend cycles of a security can be a good way to profit from bullish and bearish trends. A breakaway gap is the first sign that a reversal is occurring. In a bullish breakout gap, a security’s price will open significantly higher than a previous day’s red candlestick open or white candlestick close. This shows a gap in the price supported by investors’ belief that the security’s valuation is valid at the higher price. Adversely in a bearish reversal a breakout gap would show an open price significantly lower than a previous day’s red candlestick close or white candlestick open.
Traders believing these gaps to be breakout gaps may choose to set filter trades based on the price’s continued momentum. For example, in a bullish gap a trader could set a 1% increase price order to buy which would profit on further gains. In a bearish gap a trader could set a 1% decrease price order to sell which would profit on further losses.
Identifying a breakout gap can present a profitable opportunity since trending cycles will follow breakout gaps with runaway gaps which further support the trend. Runaway gaps are additional gaps in candlestick charts that follow momentum trends and are also typically associated with high volumes.
When a trend cycle begins to reach its end, it will typically show an exhaustion gap. An exhaustion gap is a gap higher followed by a final push in the price trending direction. Exhaustion gaps are used as a reversal signal to indicate that a new trend in a security’s price is approaching.