What Is A Breakaway Gap Chart Pattern?
In technical analysis, a breakaway gap pattern is a pattern that forms when the price of a financial market gaps up or gaps down from a price consolidation area or major resistance or support level. It occurs when the opening price is higher or lower than the prior closing price.
A breakaway gap signals the beginning of a new price trend in the market where it occurs. It can be either bullish or bearish depending on the direction of the price gap with a gap up being a bullish signal and a gap down being a bearish signal.
Types Of Breakaway Gap Chart Patterns
There are two main types of breakaway gap chart patterns. The two types of breakaway gap patterns are:
- Bullish breakaway gap: A bullish breakaway gap is when the price of a market gaps up from a trading range or breaks out from a chart pattern and starts a new bullish trend with higher prices over the next few days and weeks post the gap up.
- Bearish breakaway gap: A bearish breakaway gap is when the price of a market gaps down from a trading range or breaks down from a chart pattern and starts a new bearish trend with lower prices over the next few days and weeks post the gap down.
Breakaway Gap Pattern Components
In order to identify a breakaway gap pattern, there will need to be certain components visible on a price chart.
The components of a breakaway gap pattern are:
- A consolidation area on the price chart: There will need to be an area of sideways and consolidating price action before the breakaway gap. This is because a breakaway gap indicates a new trend so the price action prior to the breakaway will need to show a consolidation area to break out from.
- A gap up/down from the consolidation area: The price will need to gap up or down from the consolidation area. This signals a "breakout" or "breakaway" from the consolidation area.
- An increase in volume on the gap (optional): Typically, a new breakaway gap and the beginning of a new trend will show an increase in volume. This is not always the case but an added confirmation signal.
Breakaway Gap Chart Pattern Examples
Below are visual examples of the breakaway gap chart pattern.
Example Of A Bullish Breakaway Gap Pattern
On the daily price chart of Tesla stock above, a bullish breakaway gap pattern formed.
The price of Tesla originally moved within a multi-year period of consolidation. The price gapped up through the consolidation and resistance level on volume.
A new bullish trend then started in the price of Tesla that continued for many years.
Example Of A Bearish Breakaway Gap Pattern
On the daily price chart of Coupang stock, a bearish breakaway gap formed (marked with the arrow).
The price of Coupang consolidated within a price range before gapping down through the consolidation area and support level.
A new bearish trend started which continued for multiple months.
Example Of A Breakaway Gap Pattern In The Stock Market
On the above price chart of the S&P500 Index, a breakaway gap formed. The price of the index gapped down below the consolidation area and support level. The price moved lower over the next week.
Example Of A Breakaway Gap Pattern In The Commodities Market
On the price chart of Soybeans futures, a breakaway gap pattern formed. It signaled the beginning of a multi-week bullish trend in the market.
Prior to the breakaway gap, the market had been in a price consolidation period and a major resistance level formed.
How To Find Breakaway Gap Chart Patterns
The methods for finding a breakaway gap pattern in the market are:
- Use a pre-market percentage gains/loss scanner: Use a premarket screen to scan for markets that are up a percentage or down a percentage. This will highlight all the markets that are gapping up or gapping down.
- Browse through the price charts manually: A trader can manually browse the price charts of various markets to find markets that are gapping up or down.
Breakaway Gap Chart Pattern Benefits
The benefits of the breakaway gap pattern are:
- It can help traders to capture new trends: A breakaway gap can be a great way to spot and find new trends in a market.
- It is easy to learn: Spotting a breakaway gap is relatively easy. It is simply finding markets gapping up/down from consolidating price action.
- It can offer a high reward to risk ratio: A breakaway gap can over very high reward to risk ratios as a breakaway gap occurs at the beginning of new trends. A breakaway gap pattern can offer a reward to risk ratio of $4+ reward for every $1 risked.
Breakaway Gap Chart Pattern Limitations
The limitations of the breakaway gap pattern are:
- It can fail: Like any chart pattern, the breakaway gap pattern can and will fail from time to time. This is why risk management is important.
- Finding the ideal entry point can be difficult: Finding a specific entry point after the breakaway gap can be hard for traders to find and traders will typically need to drill down to lower timeframe price charts to find an ideal entry point.
Frequently Asked Questions About The Breakaway Gap Chart Pattern
Below are frequently asked questions about the breakaway gap chart pattern.
Is A Breakaway Gap Bullish Or Bearish?
A breakaway gap pattern can be either bullish or bearish depending on the direction in which the price of a market gaps.
If the price of a market gaps down from a consolidation area and starts a new trend, this gap is known as a bearish breakaway gap.
If the price of a market gaps up from a consolidation area and starts a new trend, this gap is known as a bullish breakaway gap.
What Does A Breakaway Gap Tell You?
A breakaway gap tells a trader and technical analysts that the market may be starting a new bullish or bearish trend depending on the direction of the gap.
What Timeframes Of Price Charts Do Breakaway Gaps Occur On?
A breakaway gap pattern can occur on the daily, weekly, monthly, quarterly or yearly price charts.
What's The Difference Between A Breakaway Gap And An Exhaustion Gap?
The differences between a breakaway gap pattern and an exhaustion gap pattern are:
- When it occurs: A breakaway gap pattern occurs at the beginning of a new trend whereas an exhaustion gap occurs at the end of a trend.
- What it indicates: A breakaway gap pattern indicates a new bullish or bearish trend has started in a market whereas an exhaustion gap pattern indicates that the trend has ended and the price will reverse.