Breakaway gaps

A breakaway gap is a technical configuration which typically appears on a trading chart when a currency pair is testing a specific level: a support, a resistance, a trend line, and so on. Initially, the pair is either slightly trending or moving sideways and no significant events occur. Suddenly, the pair gaps through the tested level and enters a trend in the direction of the breakout. This is when the breakaway gap forms. Fresh events create a mismatch in supply-and-demand conditions and generate a new trend.

The breakaway is considered the most attractive among all gaps, because it usually forms at the beginning of a new impulsive trend move. As a result, traders can take advantage of an early entry with a breakaway gap. The breakaway gap is often compared to another famous gap, the “runaway gap” but the latter occurs only after fresh news comes out, reinforcing a pair which is already moving in a trend.

According to many traders, to be qualified as a breakaway, a gap has to be sufficiently far from the usual trading range. Let’s take an example. If the EURUSD normally trades in the 1.08-1.10 range and then it gaps at 1.15 between the preceding day’s high and the gap-day open, a trader soon realizes that something important happened.

A breakaway gap entails the formation of a new trend and major changes occur in the trading daily structure: the high-low trading range widens and the volatility and volume increase. The trading structure changes also because the breakaway gap attracts new traders.

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