Breakaway Candlestick Patterns Explained: What They Are & How To Trade Them

Playing Markets

Breakaway patterns are easily recognized and give a fairly reliable signal.

Since candlesticks are the basic building block of most technical analysis, the ability to read the patterns they make is a valuable trading skill.  Here, we’ll go over everything you need to know to make money with breakaway candlestick patterns.

First though, let’s start with a definition.

What Is a Breakaway Candlestick Pattern?

A breakaway pattern is a 5-candlestick formation that may signal a reversal.  It consists of a large candle moving with the current trend, followed by a small candle that gaps, two more candles whose closes further the trend, and a large candle moving against trend that closes within the gap of the first two candles.

The breakaway pattern has both bearish and bullish versions.  It is also similar to the ladder pattern.  For all of these, the fifth candle becomes the beginning of the potential reversal.

Of course, candlestick patterns do not guarantee specific outcomes.  Instead, they offer clues as to what is going on in the market.

So the question is, what do breakaways really tell you?

What Breakaway Patterns Mean

Like many candlestick patterns, the name itself doesn’t reveal much.

And unlike some, English speakers do not use the Japanese name for this one.  Instead, the term “breakaway” probably comes from the way price action seems to depart from the underlying trend.  Unfortunately, the name isn’t especially memorable nor does it provide any real reminder as to how the pattern works.

In trading terms:

  • During the first period, price drove strongly in the direction of trend.
  • Before the second period began, price moved in the direction of trend.
  • During the second period, price moved modestly in the direction of trend.
  • During the third period, price closed in the direction that extended trend.***
  • During the fourth period, price moved in the direction of trend.
  • During the fifth period, price drove strongly in the opposite direction of trend and closed within the gap between the first and second periods.

***The candle representing the third period can be bullish or bearish, as long as its close extends the trend.  In other words, it can either move in the direction of trend or begin with a gap that it partially fills.

This sets the stage for reversal, as momentum appears to have been intercepted.

How To Recognize Breakaway Candlestick Patterns

Traders are attracted to patterns partly because they stand out.

However, it’s easy to see things on the charts that aren’t truly there (or anticipate events that never come to fruition).  That’s the main reason you should wait for all candles to close before making decisions based on candlestick patterns.

In theory, a breakaway pattern must:

  • Begin with a long candle moving with pre-existing trend.
  • Have a second short candle that 1) gaps and 2) moves with trend.
  • Have a third candle whose close furthers trend.
  • Have a fourth candle that moves with trend.
  • End with a long candle that 1) moves against trend and 2) closes in the gap between the first two candles.

In practicality, many traders will make some exceptions.

  • The gap between the first and second candle can go (especially in markets where gaps are less common, like cryptocurrency), as long as the final candle closes at the neckline between the first two candles.
  • The second candle doesn’t necessarily have to be a short candle, as long as it is preceded by a gap and all other criteria are met.
  • There can be more than two candles between the second and fifth, as long as all of their closes further trend.
  • The fifth candle doesn’t necessarily have to close inside the gap between the first and second, as long as it closes further against trend.

Depending on who you ask, any of these standards may be more or less important.  Technically, it would be more accurate to classify some of these variants as a different candlestick reversal pattern, such as the ladder.

This is okay, as the implication means more than the classification.  And similar patterns tend to have similar implications.

That’s not to say that these standards are altogether inconsequential (as we’ll elaborate on soon).  You should definitely consider some non-negotiable, like the direction of the candles in relation to trend or fifth candle retracing the prior three.  Just keep in mind that context trumps criteria.

Ultimately, it’s up to you to decide how seriously to take each guideline.

After all, the goal of candlestick pattern analysis is to interpret underlying price action (not just label patterns correctly).

To this end, you need to understand where they fit.

Where Breakaways Fit in the Chart Narrative

The markets are often characterized as a battle between the bulls and the bears.

Breakaway patterns show that those trading with trend pressed their advantage on candle one (and between candles one and two), continued to do so over the next three periods, then surrendered the momentum completely by the end of candle five.

On the chart, it looks like a turnover leading to a counter-trend fast break.

A Day-by-Day Example

The first day saw a powerful trending move, extending the trend.  Traders awoke the next morning to a gap, leading to further gains over the second day.  Over the course of the next two days, trend-side traders maintained the status quo as price continued to trend.  However, things were about to take a dramatic turn.  On the fifth day, counter-trend players erased the movement of the previous three days, pushing price all the way back to the gap between the first and second days.

Over the coming days, the gap is likely to become a crucial decision zone.  If those looking for reversal can defend this price band, they have a good chance at making the trend change stick.

(This is only a hypothetical illustration, as a breakaway pattern could represent a number of real-world scenarios.)

In the short-term, it amounts to a tactical counterstrike.

The question traders need to ask themselves is,

Can the trend rebound from this or will the other side run away with the reversal?

To answer that question, you’ll need more than just an understanding of Japanese candlesticks and candlestick patterns.  You’ll want to evaluate both within the context of longer-term chart patterns as well as trend and price levels.  You’ll also want to make use of your own chart markup and indicators.

Explore the history of your preferred asset(s) with respect to breakaway patterns and apply your findings to your own trading style.

Now, you can test (and/or stretch) the criteria we mentioned earlier to identify the best trade setups.  For instance, you may find that breakaways with larger third and fourth candles perform more reliably than those with smaller ones.  Or, you may find the opposite.

This is the kind of technical analysis that brings the story in the charts into full focus.

How To Trade Breakaway Patterns

Reversal points are great places to enter or exit trades, especially when you catch them early enough.

Breakaway candlestick patterns serve as easy-to-spot signs of potential reversal and may even lead to cycle-defining tops or bottoms.  Generally, you can assign greater weight to multi-stick patterns than single candles because they give you more information over a longer duration.

However, there are a few things you should know about trading candlestick patterns.

First and foremost, their hit rates rarely exceed 70%.  According to Bulkowski’s Encyclopedia of Candlestick Patterns, bullish breakaways have a 59% hit rate while bearish breakaways have a 63% hit rate.  As a trading signal, this is rather mediocre.

In addition, candlestick patterns do not have standardized price targets or measured moves like chart patterns do.  This can make it difficult to decide when to get out of your trade or how to manage your stop loss.

Moreover, failed reversal patterns often lead to continuation or consolidation.  Therefore, you need additional points of confirmation to increase your odds of success.

Some such factors include:

  • Volume – Reversals are often accompanied by elevated trading volume.  For breakaway patterns, you want to see a spike on the final (and preferably shortly thereafter).
  • Price Formations – Reversal patterns that form on the right side of important price levels or trend lines are often more reliable.  Always be aware of support and resistance!
  • Oscillator Shift – Oscillating indicators like the RSI or stochastics are commonly used to identify reversals by analyzing slope, percentile, and/or divergence.

The more corroborating elements are present, the more confident you can be about a breakaway reversal signal.

Even so, it would be difficult to form a successful trading strategy around any given candlestick pattern.  There simply isn’t enough there to develop a strong edge.  Even with a great understanding of trading math, order execution, market psychology, risk management, options, and automation, you’d still have a hard time.

In essence, breakaway patterns are much better idea givers than trade makers.

Better yet, you’ll probably find more success building your strategy around other tools then using candlestick patterns as the final point of confirmation.

Other Candlestick Pattern Types

The breakaway is but one of many candlestick patterns.

And while learning them all is not a prerequisite for successful trading, you’d certainly benefit from getting familiar with other candlestick pattern types.

They can be categorized in several ways.

The most straightforward way may be by the number of candlesticks (ie. 2-candlestick, 3-candlestick, 5-candlestick, etc.)

More helpful though, you can group them by price direction or signal type.  That is, they can be bullish or bearish and/or imply reversal or continuation.  Finally, you can multiply these designations together to separate them into bullish reversal, bearish reversal, bullish continuation, and bearish continuation categories.

On the other hand, you might just tackle them in alphabetical order:

Sure, there are quite a few.  But don’t let that intimidate you.

It’s unnecessary to memorize the name and criteria of every single pattern.  The key is to learn the principles of price action and technical analysis.

In fact, you’re free to forget all of their names and specifications as long as you can look at a group of candlesticks and understand what they are trying to tell you.  It’s just that the more of them you learn about, the easier this will become.

So take the time to study at least a few more of them.

Takeaways

To review:

Breakaways are a type of candlestick pattern that signal a potential reversal.  While not a guarantee, their appearance may indicate that market conditions are changing.  Thus, they can help you find winning trades.

Of course, there are other candlestick patterns that you should learn about.  Still, the ability to recognize patterns is not enough to trade successfully on its own.

Nonetheless, you’ve now added one more tool to your toolkit.

Have questions or more information to add?  Contribute to the conversation in the comments below!  Or, if you know someone who could benefit from this post, share it with them.  You can also check out our Candlestick Patterns Guide to improve your candlestick analysis skills.